Global fund managers are raising cash holdings and cutting exposure to equities, given persistent concerns over "quantitative failure" by central banks to stimulate economic growth, a survey has found.
Their actions come despite the fact that nearly two-thirds of respondents in Bank of America Merrill Lynch's April global fund managers survey saw at least two more interest rate hikes this year and most believe a US recession was unlikely.
Nonetheless, some 21 per cent of fund managers worldwide say "quantitative failure is the biggest tail risk" as stock valuations in certain markets remain relatively high amid the weakest global growth since the 2009 recession.
Quantitative failure refers to the idea that years of loose monetary policy have failed to produce hoped-for economic growth. This fear is being reflected in stock markets in Europe and Japan, where monetary easing policies appear to no longer have as much mojo.
DROP IN CONFIDENCE
A multi-year period of major policy intervention and 'financial repression' is ending with weak economic growth and investors rebelling against quantitative easing.
MR MICHAEL HARTNETT, chief investment strategist at Bank of America Merrill Lynch, in a note to clients.
Reflecting that unease, more fund managers are opting to sit on cash. Average cash balances hit near 15 year highs, jumping to 5.4 per cent from 5.1 per cent in March.
Cash holdings at that level are on a par with those seen around the time of Lehman Brothers' collapse in 2008, the US debt ceiling crisis in 2011, and the "Grexit" crisis in 2012.
Typically, cash holdings above 4.5 per cent signal that sentiment is about to turn and are therefore a "buy" signal for stocks, the survey said. But that is not the case now because stocks and bonds are so over-valued, it said.
The survey of 164 participants with US$493 billion (S$666 billion) of assets under management showed that fund managers cut their equity allocation to 9 per cent overweight from 13 per cent in March. This is the second-lowest allocation to global stocks in almost four years. And for the first time since 2012, fund managers are underweight Japanese stocks, despite the country's ongoing easing measures, it found. They were overweight Japanese equities in March.
At the same time, confidence in monetary easing as an EU economic growth driver dove to 15 per cent from 24 per cent in March, it added.
Mr Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, said in a note to clients that a "multi-year period of major policy intervention and 'financial repression' is ending with weak economic growth and investors rebelling against quantitative easing".
While fund managers have been underweight emerging market equities for the 16th straight month, "allocation levels improved to 11-month highs".
The Institute of International Finance estimated emerging market flow jumped to a 21-month high of US$36.8 billion in March, with an estimated tranche of US$17 billion flowing into Asian bonds and equities, making it the strongest showing since mid-2014.
Mr Adam Reynolds, Asia-Pacific chief executive of Saxo Capital Markets, said some capital inflows have returned as "emerging markets now represent much better value than earlier in the year".