Investors Hiking Cash Holdings; Expectations of Fed Hike Put Back to Q4

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Global investors have raised their holdings of cash significantly in response to a weaker global economic outlook, particularly in China, according to the BofA Merrill Lynch Fund Manager Survey for July. Overall, equity allocations are unaffected by the higher risk aversion, however.

  • Confidence in the global economy falls sharply: 42percent of investors expect strengthening over next year, down from 55 percent a month ago.
  • China heads concerns: net 62 percent expect economy to weaken in next 12 months, eight out of 10 see GDP below 6 percent by 2018.
  • Cash levels soar to highest level since 2008 crisis – 5.5 percent of portfolios; gold judged undervalued for first time in five years.
  • Increased pessimism on China led further weakness in assets linked to China: Commodity allocation drops to six-month low, and Global Emerging Market equities stays as most unloved region with allocations at 16-month low.
  • Bonds still seen as much more over-valued than equities and more at risk of volatility-driven crash; equity overweights rise to net 42 percent.
  • U.S. dollar bullishness strengthens despite postponing of expected US rate rise to Q4 2015 or later, replacing June consensus of Q3.
  • Appetite to overweight European stocks rises although potential Eurozone breakdown now biggest “tail risk.”

“Rising risk aversion and stretched cash levels provide a contrarian buy signal for risk assets in Q3,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

“Despite the Greek newsflow, intention to own European assets is high and rising, though global growth remains vitally important for European stocks,” said Manish Kabra, European equity strategist.

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