Risk Off (Again)

(April 17, 2012)  —  Investors have taken conservative stances in their portfolios once more after a brief flirtation with risky assets last month, as concerns continue over Europe and a possible extra round of Quantitative Easing in the United States.

Some 24% of respondents to the monthly Bank of America Merrill Lynch asset allocation survey were overweight cash in their portfolio.  This was up from only 6% with the same allocation last month.

Average cash positions in global equity portfolios rose from 4.2% to 4.7%, the survey showed.

Michael Hartnett, Chief Global Equity strategist at BofA Merrill Lynch Global Research, said: “Investors have moved to a more neutral position after positive shifts in sentiment and risk taking in the first quarter. We believe investors will retain a sense of caution throughout the second quarter.”

Fewer investors were overweight equities this month – a net 26%, down from 33% last month – and those sticking with the asset class moved out of cyclical stocks to counter-cyclical ones.

One of the main drivers for this shift has been fears over the continued faltering of the Eurozone economies. A higher number of investors predicted significant problems for Spain – whose cost of borrowing reached record levels this week.

Jim Reid, Head of Global Fundamental Credit Strategy at Deutsche Bank, said Spanish CDS – insurance against default – remained under pressure as the five year closed at a new all-time wide, above 500 basis points.

Reid added: “It’s not just the government bond levels that have come under pressure – its stocks have also underperformed. On a day when most major European indices finished in positive territory, albeit off the day’s intraday highs, the IBEX index fell a further 0.57%. The index has fallen 15 of the last 18 trading days for a total of -16% and is now at its lowest level since March 2009, just 5.7% above the crisis lows.”

Investors were also concerned with political movements in France. The Gallic presidential elections have created a ripple, but the main candidates split the vote, their potential wins each earned around 40% of the vote.

Gary Baker, Head of European Equities strategy at BofA Merrill Lynch Global Research, said: “The survey highlights that while investors’ primary concern in the EU is Spain’s economy, the outcome of and uncertainty around France’s elections is also figuring high in their decision making.”

Global investors are bullish on the US, however, with increased allocation to the country’s equities being reported this month. However, US-based investors are less confident. A net 8% of domestic investors said their home economy would improve over the next 12 months, down from 29% in March.

Mark Holman, Managing Partner at Twenty Four Asset Management, said this week would be pivotal for ‘risk assets’.

Holman said: “Washington DC hosts the G20 Finance Ministers meeting starting today and then later in the week it hosts the IMF’s annual Spring Meeting, where increasing crisis contributions will be high on the agenda. Added to that, the reporting season really gets going this week with a large number of key banks and corporates reporting Q1 figures.”

BofA Merrill Lynch surveys investors responsible for $706 billion.