Global investors have scaled back risk-taking in the past month, trimming overweights in emerging markets and reducing exposure to equities and commodities while increasing allocations to cash and bonds.

A net 23% of global investors are now overweight emerging markets, from 29% in May, according to the Bank of America-Merrill Lynch Fund Managers Survey for June.

While emerging markets remain the most favoured region ahead of the US, allocations are well down on the highs of November (56%) and below the long-run average, the survey finds.

The cut in emerging market positions comes amid a broad-based rotation towards defensive assets. The net percentage overweight in equities fell to 27%, from 41% in May.

Europe led the way, with the proportion of investors underweight eurozone equities rising to 15%, from 1% previously. The proportion of investors overweight commodities fell to 6%, from 12%.

A net 18% of asset allocators are now overweight cash, the highest level in a year and up from 6% last month. The proportion of investors taking lower-than-average risk across portfolios rose to 26%, from 15% in May.

But bonds, unloved throughout much of the last two years, continued to enjoy something of a recovery. A net 35% of asset allocators are now underweight bonds, against a net 58% in April and 44% in May.

Concerns about sovereign debt funding in Europe are understood to be behind these shifts in allocations, with investors naming this issue as the biggest tail risk in the June survey.

But Gary Baker, head of European equities strategy at BoA-Merrill Global Research, notes that while investors are scaling back, they are not capitulating but rather moving to more neutral positions in equities, bonds and cash.

Broad sentiment towards the global economy seems to have stabilised, with almost two-thirds of respondents not expecting a third round of quantitative easing, or QE3.

Michael Hartnett, chief global equity strategist at BoA-Merrill Global Research, adds: “Investor capitulating from risk assets is not yet visible, despite higher cash levels and defensive rotation. Fears on global growth will need to rise further before hopes for QE3 can begin to be priced in.”

Meanwhile, inflation expectations fell sharply, from 61% to 38%, which is the lowest reading since October last year. A peak in inflation would be good news for emerging market equities, since inflation has been one of the major headwinds for emerging markets in recent months.

Yet at the same time, China growth expectations have fallen to their lowest level since January 2009. A net 40% of regional fund managers from across emerging markets, Asia-Pacific and Japan believe China’s economy will weaken in the coming 12 months.

Accordingly they have reduced exposure to Chinese equities. A net 33% of global emerging market investors are overweight China, from 42% a month ago.

But China remains among the most favoured markets among EM investors, behind only Russia (67%) and Indonesia (40%). The least favoured are Malaysia (-53%) and Taiwan (-47%), while underweight on India is scaled back to -20%.

Among Asia-Pacific investors, Hong Kong (25%) is now the most favoured market in Asia, followed by China (17%) and Taiwan (8%). The least favoured remain Australia (-17%), Philippines (-13%) and India (-13%). Korea (-8%) has moved to underweight, from neutral.

In line with overall risk aversion, global investors reduced allocations to cyclical sectors such as industrials, discretionary and materials. The largest reduction in allocations was in insurance in the wake of claims stemming from catastrophes including earthquakes and tornadoes.

But sentiment in Japan appears to be recovering. Following the March 11 earthquake and tsunami, when investors were split roughly 50:50 on the country’s economic direction, an overwhelming 89% of respondents in June expected Japan’s economy to strengthen.

Nevertheless, global investors have not re-embraced Japan. A net 22% of asset allocators are underweight Japanese equities, up from 17% in May.

Meanwhile, EM investors maintain their tilt to domestic demand, with consumer discretionary the most favoured sector (53%). Tech (20%) and industrials (7%) are the only other overweights.

The defensive sectors of utilities (-87%) and telcos (-27%) remain least favoured. Energy positions are cut to underweight (-13%).

Asia-Pacific investors have also trimmed their positions in cyclical securities. Though industrials (25%) and tech (25%) are still the most favoured sectors, their allocations have dropped sharply. The least favoured remain utilities (-42%), insurance (-25%) and media (-25%).