Understandably, global investors continued trimming their positions in the past month, remaining defensive, as they tried to work out whether the current Wall of Worry was a repeat of 2010’s or more serious.
Wednesday’s nasty sell-off confirmed the rightness of that pullback and dash for safe havens of cash and defensive shares.
But there has been no sign yet of larger panic, according to the Bank of America-Merrill Lynch fund manager’s survey for June.
Perhaps that will come this month if Wednesday’s sell down is repeated and Greece heads towards default.
Asset allocators have been adjusting portfolios in the face of falling world markets, significantly reducing their holdings in equities.
The net percentage overweight equities fell to 27% from 41% in May, with Europe leading the way.
The proportion of investors underweight eurozone equities rose to a net 15% from a net 1%.
Also worrying them is what happens after the end of this month when the Federal Reserve’s second round of easing ends.
This survey was taken from June 3 to June 9, so it captured the period when global markets developed a good dose of nervousness over the state of the US economy and the predicament Europe finds itself in with the second round rescue of the broken Greek economy, which seems to be going nowhere.
The survey of 282 global and regional managers responsible for $US828 billion reported that the proportion of global investors with a net overweight position in cash rose to 21%, the highest level since May 2009, as managers sold out of equities and commodities.
They now have an average cash balance of 4.2% of their portfolio, up from 3.9% in May.
Since May’s survey, the percentage of managers overweight in equities has fallen from 41% to 21%, while the percentage of managers overweight in commodities halved from to 6%.
However, managers seem resigned to the fact that there will be no further rounds of quantitative easing with just 13% expecting further stimulus during the second half of this year.
Investors have cut expectations of strong global profit growth, although broad sentiment towards the world economy stabilised, with nearly two-thirds of respondents saying they did not expect the Federal Reserve to undertake a third round of quantitative easing (QE3).
“Investor capitulation from risk assets is not yet visible despite higher cash levels and defensive rotation,” said Michael Hartnett, BofA Merrill’s chief global equity strategist. “Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in.”
The survey suggested there were no signs of investor panic with the gloomier outlook, with global growth expectations stabilising and three out of four respondents thinking a recession unlikely.
"Investors are scaling back risk, but rather than capitulating, they are simply moving to neutral positions in equities, bonds and cash,” said Gary Baker, head of European equities strategy.
The proportion taking lower-than-average risk across their portfolios rose to a net 26% from 15%.
The shift away from risk assets also meant the percentage of asset allocators who were underweight bonds fell to 35% per cent from 44% in May and 58% in April.
Concerns about sovereign debt funding in Europe were cited as the main factor behind the reduction in risk exposure.
The survey showed investors struggling to form a clear view on emerging markets (EM).
The proportion of asset allocators overweight the EM equities fell to a net 23% from 29% in May, although the number who said they would most like to be overweight increased to 22% from 16% a month ago.
While optimism towards emerging market equities as a whole is on the up, concerns over the direction of China’s economy continue to grow.
A net 29% felt the outlook for corporate profits was more favourable for emerging markets than any other region.
In terms of the largest "tail risk" perceived currently, a net 43% of those polled said "EU sovereign debt funding" this month, compared to 36% in May and 21% in April.
The percentage citing the remaining tail risks — municipal default, Chinese real estate and commodity price inflation, among others
Concerns about commodity price inflation have fallen sharply in the past few months. In June, a net 9% of fund managers saw that as a tail risk, compared to 34% in April.
This month, views about when the Federal Reserve will raise rates were adjusted yet again.
"Q1 2012 remains the most favored timing option for investors, but the biggest relative jump in expectations was for Q3 2012," the survey said.
In terms of asset allocation, a net 27% of portfolio managers were overweight equities in June, down from 41% in May and 50% in April "and is now very close to the long run average of a net 25%," the survey said.
"The position contrasts with the all-time peak of 67% overweight seen in February," BoA/Merrill said.
Regional preferences for equity allocation were modestly changed, with 23% managers overweight global emerging markets, which remained the most popular region, from 29% in May and 22% in April.
The survey said 20% of were overweight U.S. equities in June, compared to 26% in May and 30% in April, while 15% were underweight eurozone equities, compared to 1% underweight
