LONDON, Aug 12 (IFR) - The number of investors buying crash
protection against a sharp fall in stock markets over the coming
months has risen to its highest level since October 2008,
according to Bank of America Merrill Lynch's fund manager survey
Investor cash holdings have also risen sharply over the past
month from 4.6% to 5.1% - their highest level since June 2012 -
as concerns over geopolitical risk have spiked since the July
"At these high levels, it suggests that all kinds of risks
are priced in over the near-term," said Manish Kabra, European
investment strategist at BAML. "We expect risk assets to rally
in August and move towards recent highs. But absent capitulation
on the growth outlook, it is not time to close your eyes and buy
- it's not necessarily a long-term trade."
Volatility slumped to record lows earlier in the summer on
the back of ultra-loose monetary policies from the world's four
largest central banks. The CBOE's equity volatility index - or
VIX - fell to a six-year trough of 10.32 in July as the S&P500
reached a new high of 1,991. Fixed income strategists had to
dust down the history books to find when foreign exchange and
rates volatility had last plumbed such depths.
But volatility has edged upwards since signs of the Ukraine
crisis escalating after the MH17 air disaster in July, which
sparked a further round of sanctions from the US and European
Union against Russia, causing it to retaliate with its own ban
on selected food imports. The VIX spiked to a four-month high of
17.57 during trading on August 1 as stock markets sold off.
The BAML fund manager survey confirmed that geopolitics is
at the forefront of investors' minds, with 86% citing it as the
greatest risk to financial stability - up from 74% in July and
53% in June. This trumped worries over monetary policy risk
(such as higher rates and higher FX volatility), which 58% of
investors cited as a risk to financial stability.
"We've only seen concern over geopolitical risks at a higher
level in the Arab Spring of 2011. This is the third highest
reading in ten years," said Kabra.
Derivatives desks have reported strong demand for put
options to protect equity portfolios. S&P 500 skew - the
difference between the price of in-the-money and out-the-money
put options - spiked to its highest level in a year last week,
according to strategists at Societe Generale.
Many investors appear to have lost faith in European
equities following a slew of weak economic and inflationary data
and fears that sanctions will weigh further on the continent. A
net 13% of fund managers are currently overweight Eurozone
equities - a sharp fall of 22 percentage points in the space of
Three months ago, a net 28% of investors expected to go
overweight European equities, BAML said, which has now swung to
a net 4% saying they would go underweight the region. Eurozone
banks have been particularly badly hit, with weighting to the
sector falling to a two-year low.
Global investors have led the charge out of Europe. Their
profit outlook for European companies has fallen sharply from
the highest level since the BAML survey began earlier this year
into negative territory. Their intention to own European
equities on a 12-month view has also swung sharply from over 40%
into negative territory.
"Global investors are losing patience on European
profitability," said Kabra."Local investors are still quite
positive, though, with net 53% expecting profits to rise."
As well as remaining on investors' balance sheets, much of
the cash leaving European equities has found its way into
emerging markets, commodities and defensive stocks. Asia Pacific
investor allocation to China is also at an 11-month high, the
BAML survey found.
But most investors still believe the ECB will undertake
quantitative easing at some point, with 63% of respondents still
expecting some kind of asset purchase programme. However, the
consensus has shifted from the end of this year to sometime in
(Reporting by Christopher Whittall, Editing by John Mastrini)