Risk Off as Cash Holdings Reach 2008 Crisis Levels
Global investors’ confidence in the world’s economic outlook has fallen significantly due to concerns over China and emerging markets, according to the BofA Merrill Lynch Fund Manager Survey for September. Asset allocators have adopted a “risk-off” stance in response.
· Threat of recession in China increases as biggest tail risk; concern over a potential emerging markets debt crisis also rises sharply.
· Investors’ risk appetite evaporates: equity overweights are down a net 24 percentage points in a month, while commodity shorts are extended.
· Sentiment towards Global Emerging Markets sours further, with underweights at a record net 34 percent and aggressive UWs are at an all-time high.
· Cash balances are back up to 2008 crisis level of 5.5 percent.
· Hedge fund net exposure and perception of market liquidity conditions are both at the lowest level in three years.
· Investors’ expectation of U.S. Fed rate rise has been postponed to Q4.
“Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified. Contrarians will be noting the aggressive underweight positioning in emerging markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
“European equities have been hurt by the risk-off trade, but they remain a favored market,” said James Barty, head of European equity strategy.
