UK – Institutional investors have moved away from risk, according to new reports from Merrill Lynch and State Street.
Merrill Lynch’s monthly survey of fund managers found that a “significant” rise in risk aversion was prompting asset allocators into making “a sharp rise in cash levels”.
The report found that the net overweight cash position has risen from nine percent in April to 27% in May. The mean cash balance was up to 3.9% from 3.7%.
“Cash may be king for longer than we expect,” the survey said.
“Professional investors made substantial downward adjustments in the risk of their portfolios in the first few months of 2004, but are now clearly in a holding pattern awaiting fresh news,” said State Street Associates’ Paul O’Connell. “By cutting risk, they prepared their portfolios for possible early increases in rates by the Fed.”
The comments came as the State Street investor confidence index declined by 0.6 points from April’s revised reading of 92.0. However, April investor confidence was revised upwards by 1.2 points.
“Right now it’s a war of attrition, with recent positive earnings surprises battling against Asian overheating, prospective US Fed rate increases, and soaring commodity prices”, said the measure’s co-creator Ken Froot. “Professional investors know the risks, and their prior efforts to take risk off the table anticipated this struggle.”
Meanwhile, the Merrill survey found that corporate balance sheet repair – such as rebuilding pensions – is higher up the agenda for fund managers. Twenty four per cent of the panel, three percentage points more than last month, said they would like to see cash flow spent on repairing the balance sheet.
“Inflation, inflation, inflation,” was the theme this month said Merrill’s chief global strategist David Bowers. Fears about higher inflation had spread in spite of the deteriorating expectations for global economic recovery, Bowers said.
All UK panellists agree in expecting the Bank of England to raise rates, while 30% of their European counterparts still think the European Central Bank’s next move will be down.