Ukrainian Crisis Spooks Global Asset Allocators

Geopolitical tensions move to reduce risk exposure, survey finds

Growing tension in Ukraine and the prospect of widespread geopolitical instability have unnerved global investors, moving them toward a “risk-off” stance, Bank of America-Merrill Lynch found in its March Fund Manager Survey.

Eighty-one percent of investors saw geopolitical risk posing a threat to financial markets stability, more than four times the reading one month ago. Twenty-seven percent of respondents said a geopolitical crisis was the biggest tail risk, up from 12% in February.

At the same time, global asset allocators continued to express concern about prospects for emerging markets, with sentiment toward China’s economy falling further.

BofA Merrill Lynch Research with help from TNS, a market research outfit, surveyed 241 fund managers with $636 billion of assets under management from March 7 to March 13.

Fourteen percent of fund managers surveyed were taking lower-than-average risk in March, up from 2% in February. Sixteen percent said they were overweight cash, up from 12% last month. Average cash balances remained high at 4.8% of portfolios.

The proportion of asset allocators that were overweight equities dropped by nine percentage points month-on-month to 36%. Demand for protection against sharp falls in equity markets increased to its highest level in 22 months, the report said.

The survey found investors less confident in a vibrant recovery in corporate profit growth. Forty percent of respondents believed that global profits would improve in the coming 12 months, down from 45% in February.

Twelve percent said it was unlikely corporate profits would rise by 10% or more in the year ahead, up from 4% of respondents taking that view in February.

At the same time, investor demand for companies to borrow and invest eased since February. Thirty-four percent of respondents said corporate balance sheets were underleveraged, down from 40% last month. Sixty-three percent believed that companies were underinvesting, down from March’s high of 67%.

Last month’s sectoral allocations reinforced a defensive mindset, with a big drop in allocations toward banks and a rise in ones to energy companies and utilities.

Hedge fund managers reduced both leverage and exposure to equities, illustrating the risk-off mentality taking shape in the March survey. The weighted average ratio of gross assets to capital fell to 1.34 times from 1.49 times, the lowest in 20 months. Thirty-one percent of hedge funds had a leverage ratio of less than one time, compared with 19% in January.

Weighted net exposure to equities fell to 29%, the lowest since June 2012.

Investor sentiment toward global emerging markets was bottoming out in March and improvement was in sight, according to the survey. Although the view toward China deteriorated further, investors saw scope to return to the region.

Forty-seven percent of regional fund managers in Japan, Asia-Pacific and global emerging markets expected China’s economy to weaken in the coming year, up from 41% a month ago.

The proportion of global asset allocators that were underweight emerging market equities rose by two percentage points to 31%, a record.

On the brighter side, investors said they saw value in the region. A record 49% of the global respondents believed that emerging markets were the most undervalued of the regions, compared with 36% in January.

Further, the proportion saying that emerging markets was the area they would most like to underweight in the coming year fell by three percentage points to 21%.

 

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