LONDON Risk-averse investors stuck to a high level of cash holdings in December as they prepare for slow growth next year and a potential euro zone breakup, a closely watched Bank of America Merrill Lynch survey showed on Tuesday.
A break-up of the euro zone involving a country possibly leaving the single-currency bloc and a U.S. sovereign debt downgrade remained the top concerns for investors going into 2012.
The monthly global fund managers' survey from Bank of America-Merrill Lynch showed a net 35 percent of fund managers were overweight cash, down from 38 percent in November but still a high reading. The index reading shows the difference between overweight and underweight positions.
"It's pretty grim. We end the year with investors holding lots of cash, expecting low growth and being quite risk averse," said Gary Baker, European equity strategist at BofA Merrill.
"Two thirds of respondents are describing 2012 to be below trend growth."
The average cash balance remained high at 4.9 percent, above the 4.5 percent threshold that BofA says signals high cash levels.
The survey of 190 participants with combined assets of $608 billion, taken just before the weekend European Union summit, showed 44 percent of respondents expect a country could leave the 17-nation bloc using the single currency.
"Nothing that emerged from the summit would have changed their view because the key is the role of European Central Bank. I wouldn't be surprised if we asked the (euro breakup) question today and we get this 50-50 split," Baker said.
Those expecting a U.S. sovereign debt downgrade in the future rose to a net 70 percent this month from 53 percent, highlighting that this remained a key risk for investors.
The survey also found a net 8 percent of respondents were overweight equities, compared with 5 percent being underweight last month. This compares with February's all-time peak in equity overweights of 67 points.
Bond allocations moved to a net 27 percent underweight compared with 23 percent underweight last month.
Views on market liquidity conditions deteriorated, with a net 13 percent saying they are negative -- the lowest reading since April 2009 -- compared with 0 percent last month.
The euro zone remained the least favored region, while participants liked equities in global emerging markets and the United States.
Hedge funds reduced their gearing levels. The ratio of their gross assets relative to capital fell to 1.41 from 1.47 last month. Their net exposure to equity markets -- measured as long minus short as a percentage of capital -- rose to a 4-month high of 31 percent from 26 percent in the previous month.
(Editing by Hugh Lawson)