High commodity prices are sapping confidence in corporate profitability and global growth, with fund managers raising cash holdings and further cutting emerging market positions.

The average cash balance rose to 4.1% in March, from 3.5% in February, according to the latest Bank of America-Merrill Lynch global fund managers survey.

“It feels like wait and see rather than risk aversion,” the bank notes in its report. “Cash is replenished, but this could reverse with easing Mena geopolitics or if the ECB threat of higher rates proves overplayed.”

Global investors cut emerging market allocations to flat, the fourth successive drop and the lowest level in two years. Fund manager allocations to emerging markets had been as high as +56% as recently as last November.

A net 52% of emerging market investors think their asset class is now undervalued, the highest reading since June 2010. Since investors cut their EM allocations sharply in February, EM equities have outperformed developed market equities.

“Positioning now looks much healthier and, combined with relative valuation at a 12-month low, EM underperformance appears behind us,” notes the report. “To see significant gains, however, the asset class needs to see inflation pressures subside.”

The survey suggests recent erosion of confidence in emerging markets is starting to turn. Just 15% of fund managers now expect China’s economy to weaken in the next year, from 27% last month. Globally, the identification of China’s real estate market as a tail-risk also declined.

The sharp rise in oil prices has evidently dented confidence. A net 24% of asset allocators now expect corporate operating margins to fall over the next 12 months – the sharpest monthly decline for this question. As recently as January, a net 10% were expecting margins to expand.

“If the oil price reverses, this change in sentiment could prove quite fleeting,” notes Gary Baker, head of European equities strategy at BoA Merrill global research. “There has been no massive sell-off. Investors are in wait-and-see mode.”

A net 32% of fund managers still look for corporates to increase profits in the next year, although this is down from 51% a month ago. A net 31% now view consensus earnings as too high.

While 31% of fund managers still believe the global economy will strengthen in the next year, this is down from a net 51% last month. A positive outlook among US fund managers for the US economy fell from 52% to 21%, while Asian investors turned negative on their regional outlook.

Ironically this leaves European investors as the most optimistic, with 35% expecting the European economy to strengthen in the next 12 months, even though this fell from 54% in February.

“European investors are still positioned for continued cyclical expansion, with imminent rate hikes by the ECB and BoE now being seen as a near-certainty,” finds the report. “As a result, sector allocations remain heavily biased towards cyclicals, leaving investors exposed to rotation into defensives or even financials on any macro surprises.”

Even though fears of recession remain remote, the threat of stagflation has risen. In just two months the proportion of fund managers anticipating below-trend growth and above-trend inflation has doubled to 28%.

Investors reduced exposure to equities and commodities in March. A net 45% report being overweight equities, down from 67% in February; commodity overweights fell to a net 21%.

Strikingly, though, this lower level of risk has not translated into greater enthusiasm for bonds, with investors’ underweight on the asset class down only a touch from last month to 59%.

Nevertheless, investors have not altered sector allocations significantly. Their appetite for technology growth stories stays high, while they’re still overweight cyclicals like basic materials and industrials. They also remain underweight defensives such as consumer staples and utilities.

Asia-Pacific investors increased allocations to China (+31%) and Hong Kong (+19%), with positions funded out of Taiwan. Their least favoured markets are India and Malaysia, while they cut Singapore and Korea to underweight.

Overall, 203 fund managers with a total of $602 billion participated in the global BoA Merrill survey from March 4 to March 10. A total of 168 managers took part in the regional surveys.