Investors positioned for ‘summer of shocks’: Survey

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Investors across the globe are positioning themselves for a "summer of shocks", a new survey shows. The Brexit referendum, fear of a Chinese default and concerns that loose monetary policy will fail to ignite the economy are among the key threats cited in the latest Bank of America Merrill Lynch Fund Manager Survey.

Nearly 71 percent of investors say Brexit is either "unlikely" or "not at all likely" but the big plunge in U.K. equity allocations this month suggests they have prepared for the worst.

Brexit is seen as the biggest "tail risk" for fund managers across the globe taking part. The survey involving 168 participants with $505 billion assets under management found 27 percent of fund managers pointing to a default or devaluation in China as the biggest risk. Chinese growth expectations fall sharply to net 50 percent expecting a weaker economy, as compared to 22 percent last month.

Quantitative failure, the risk of central bank policy failing, is also considered a big risk by nearly 15 percent of those surveyed.

On the U.K. equity front, fund managers believe allocations have plunged to their lowest level since November 2008 while a net 20 percent of investors think sterling has hit the second most undervalued reading on record, citing it as a good opportunity for traders looking to sell U.K. volatility or buy upside optionality.

Fund Manager Survey cash levels have gone up from 5.4 percent to a high 5.5 percent, with only 12 percent taking "higher-than-normal" risk.

Meanwhile, 33 percent of managers expect the global economy to "get a little stronger" from a net 67 percent saying "get weaker" last month. This is the strongest response in a year. Adding to that, 44 percent of managers expect "slightly higher inflation" and the next rate hike from the U.S. Federal Reserve is expected in the third quarter of 2016. Nearly 49 percent expect the Fed to hike twice over the next twelve months, while about 31 percent think there will be only one hike.

The majority of fund managers continue to remain underweight equities. While 44 percent are underweight resources, another 22 percent are seen underweight industrial. Only about 11 percent are overweight financials. The survey found no fund manager to be underweight banks.

"An equal number of managers expect the equity market to be up or down over the next six months. Last month, a net 25 percent expected the market to be down in six months," the survey says pointing to oil prices and the U.S. dollar as the biggest driver for equities in the next 6 months. Oil is viewed as the least undervalued in 10 months.

On the currency front, a net 20 percent of investors think the yen is overvalued, which is the highest reading in nearly 19 months. While 12 percent think the U.S. dollar is undervalued, another 17 percent think euro is overvalued.

Only about 5 percent of investors think global profits will deteriorate over the next 12 months. Given the anemic growth environment, a record 73 percent of investors think companies are currently under-investing in their businesses.

Figures in asset allocation see a decline with equity allocation falling to 6 percent, as compared to 9 percent last month and bonds dipping to 41 percent vs. 38 percent last month. However, a modest improvement can be seen in allocation to commodities.

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