Brexit seen as biggest tail risk, according to BofA ML survey

Brexit emerged as the biggest tail risk in Bank of America Merrill Lynch’s global fund manager survey for June, which also revealed cash levels at their highest since 2001.

Brexit was seen as the biggest tail risk by far, at 30%, followed by quantitative failure at 18% and China devaluation/defaults at 15%.

The bank said the survey revealed a large short in sterling and the FTSE, although 2 out of 3 investors thought Brexit was either unlikely or not at all likely. This explained why a record net 26% of respondents thought the pound was currently undervalued.

BofA ML said risk aversion was consistent with recession, but global growth expectations were at a six-month high, while global inflation expectations were at a one-year high.

The survey revealed big bear signals, with a cash level of 5.7% up from 5.5% the previous month and at its highest level since November 2011.

Meanwhile, equity allocation was at its lowest versus cash/bonds/commodities since July 2012, with a net 1% of respondents ‘overweight’ from a net 6% OW last month.

Allocation to bonds improved to 3.5-year highs, with a net 34% ‘underweight’ versus a net 41% in May.

Elsewhere, allocation to commodities jumped to 12-month highs, with 12% ‘underweight’ from a net 19% UW last month.

The survey showed allocation to US equities improved a touch to a net 15% ‘underweight’ from 18% in May. However, investors are no UW US equities for 16 straight months.

Of all the regional equity markets, Europe remained the most preferred on growth optimism and monetary stimulus.

“Relative positive views are driven by growth optimism and the belief that ECB will stay the course of max-easing.”

Eurozone equity allocation was unchanged at a net 26% ‘overweight', while allocation to UK equities bounced back to 23% ‘underweight’ from 36% UW last month.

BofA ML said 37% of investors reckon the US dollar is the biggest driver of equity prices in the next six months, while 25% believe it’s oil prices.

As far as expectations about the Fed are concerned, 2 out 3 investors expect a hawkish statement but no hike in June.