Fund managers globally have made a big switch back into Japanese stocks, but are the most underweight they have been for a long time on UK and US equities (see figure 1), according to the latest monthly survey* from Bank of America Merrill Lynch.

These shifts come as investors flag as the two biggest tail risks a crash in global bond markets (cited by 28%) and a policy mistake by the US or European central banks (27%) (see figure 2 below). In June, the biggest risk fear was that over a tightening in Chinese credit markets, but that has slipped into third place this month.

Figure 1: Allocation shifts (click for full view)

The net percentage of investors who say global monetary policy is “too stimulative” continued to climb to 48%, the highest number since April 2011.

Japan on the rise

Global investors’ allocation to Japanese stocks increased to +18% overweight (OW) in July from +1% in June, while they cut allocations to other regions. The allocation to Japan increased for the first time since March.

The net percentage of investors saying they aim to overweight Japan equities (net minus underweight) in the next 12 months was 11% (up 8 percentage points over June).

Figure 2: Tail risk concerns (click for full view)

In contrast, allocation to UK stocks has risen this month to net 30% UW, up from net 23% UW in June, while allocation to US equities has grown to net 20% UW from net 15% UW over the same period. This is the biggest UW in US stocks was since January 2008.

Europe and EMs

European and emerging-market stocks lost favour a little, but remain very popular. Allocation to eurozone equities has dropped to net 54% OW this month from net 58% OW in June, while allocation to EM equities has fallen to net 37% OW from net 42% OW.

That said, investors are becoming skeptical about further improvements in Europe: a net 51% expect the European economy to strengthen over the next 12 months, down from net 61% last month.

Cash levels dipped slightly from 5.0% to 4.9% but remain well above the 10-year average of 4.5%, and allocators are very OW the asset class. The main reasons quoted for this are bearish views on markets (cited by 25%) and a preference for cash over low-yielding equivalents (20%).

*An overall total of 207 panelists with $586 billion under management participated in the survey. 179 participants with $525 billion in AUM responded to the global survey questions, and 96 participants with $211 billion responded to the regional survey questions. The survey period ran from July 7 to 13.