Cash levels for investor jumped to 5.8% in October from 5.5% in September, their highest levels since July following the Brexit vote and the fall of 2001, after the terrorist attacks on Sept. 11, Bank of America Merrill Lynch's latest fund manager survey showed.
What's making investors so risk averse? "This month's cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves," Michael Hartnett, Bank of America's chief investment strategist, said in a statement.
Twenty percent of fund managers cited fears of EU disintegration as the biggest tail risk, 18% a bond market crash/rising credit spreads and 17% the prospect of Donald Trump winning the presidency.
Manish Kabra, Bank of America's European equity quantitative strategist, said that despite investors fear of an EU breakup, "European fund managers surveyed are more optimistic about the economic growth outlook for the Eurozone and expect stronger inflation."
The fund manager survey cash rule works as follows, Bank of America noted: 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.
Bank of America said a lower cash/risk rally awaited trust and certainty in U.S./EU politics, a "good" (meaning no crash) slow rise in bond yields and a clear earnings-per-share upswing.
The survey found that inflation expectations were at a 16-month high, and stagflation fear was at its highest point since April 2013. As well, investors' perception of developed market equity and bond valuations was at a record level, net 55%.
