Investors have cut their emerging market stock allocations to an all-time low and raised cash balances to levels seen during the 2008 crisis as risk appetite has evaporated, a Bank of America Merrill Lynch (BAML) survey showed on Tuesday. Investor confidence in the global economic outlook has fallen significantly, according to the bank's fund manager survey for September, with underweights to emerging market equities at a record net 34 percent.
Some 75 percent of respondents identified a recession in China or an emerging markets debt crisis as the biggest tail risks. Given this gloomy outlook it is perhaps not surprising that only 25 percent of survey respondents now expect the US Federal Reserve to raise interest rates this week, down from 48 percent in August. About 55 percent of respondents expect the first US rate rise for nearly a decade in the fourth quarter.
Investors have pulled some $58 billion from emerging market equity funds in the year to date taking fright at mounting political turmoil, Chinese stock market volatility and worsening economic data., In its September report, BAML noted an "unambiguous flight to quality", with a big increase in respondents' weightings to cash and bonds. Cash levels are now at 5.5 percent, equivalent to the highs set following the collapse of US investment bank Lehman Brothers in 2008, whilst bond allocations are at their highest since May 2013.
"Investors were already positioned for lower growth in China and emerging markets, but their risk-off stance has intensified," said Michael Hartnett, chief investment strategist at BAML Global Research. Equity allocations were cut to a three-year low, commodity shorts were extended, and hedge fund gross asset exposure sank to its lowest level since June 2012. An overall total of 214 respondents with $593 billion of assets under management participated in the survey, which was carried out between September 4-10.
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