Investors Hold More Cash, Fewer Stocks in February: Merrill

Global investors in February indicated that they were reducing risk and cyclicality by rotating out of equities and into cash, Bank of American Merrill Lynch reported Tuesday in announcing the results of its latest fund manager survey.

Investors’ allocation to equities fell to net 43% from net 55% overweight in the January survey, the largest one-month decline in two years. Allocation to bonds hit a record low of net 69% underweight.

Average cash balances rose to 4.7% from 4.4% in January, moving the fund manager cash rule from “neutral” back into “buy” territory.

The cash rule holds that when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities; when the cash balance falls below 3.5%, a contrarian sell signal is generated.

“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip,” Merrill’s chief investment strategist Michael Hartnett said in a statement.

The European equity allocation was at its lowest in nearly a year, net 41% overweight, according to Manish Kabra, Merrill’s head of European quantitative equity strategy.

“Despite improving confidence in European earnings, the U.S. and emerging market profit cycles seem more favorable to investors right now,” Kabra said.

Allocation to Japanese equities dipped slightly to a net 26% overweight in January, but remained close to two-year high of 32% in November.

“The Japanese market exhibited sensitivity to global risk sentiment in the recent market sell-off,” Merrill’s chief Japan FX/Equity strategist, Shusuke Yamada, said in the statement.

“It seems stabilization of the global equity market and a weaker Japanese yen may be needed for global interest to return.”