Growing fears of a hard landing for China’s economy have further marginalized emerging market equities, according to the BofA Merrill Lynch Fund Manager survey for February.

But investors have sent a clear signal that sentiment toward developed world equities remains strong.

A growing proportion of investors – 46% in February – say that a China hard landing and commodity collapse represents the biggest tail risk to the global economy. That figure compares with 37% in January and 26% in December.

Belief in global economic growth has moderated. A net 56 percent expects the global economy to strengthen in the coming 12 months, down 19 percentage points from a net 75% last month.

Global equity allocations are down; a net 45% of asset allocators say they are overweight equities, down from a net 55% in January. Average cash balances have increased to their highest level since July 2012 of 4.8% of portfolios, up from 4.5%.

But regional data shows that concerns are focused on Global Emerging Markets (GEM), while optimism towards Europe and the US remains strong. Allocations to GEM have reached a record low with a net 29% of asset allocators underweight the region.

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At the same time, a record net 40% of the global investor panel says that the eurozone is the region they most would like to overweight in the coming 12 months. US equities are becoming more popular – a net 11% of asset allocators are overweight the US, up from a net 5% a month ago.

Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said: "High cash levels, at 4.8 percent of portfolios, are sending an unambiguous ‘buy’ signal for risk assets."

John Bilton, European investment strategist, said: "Investors remain firmly bullish towards developed markets and Europe in particular. But we would caution that current valuations in Europe already fully price in the region’s growth outlook."

Cash stand-off: Corporates vs. investors

While cash levels accumulate in investors’ portfolios, the Fund Manager Survey shows a new record number of investors demanding corporates put their cash to work in the real economy.

The proportion of investors saying that companies are underinvesting has climbed to 69 percent, thereby eclipsing the record set one month ago of 67%.

Furthermore the gap, or spread, between investors wanting corporate to increase capital expenditure (capex) rather than return cash to shareholders remains at a record high. Fifty-eight percent of investors want to see more capex, while 25% opt for dividends and buybacks – a spread of 33 percentage points.

At the same time, nearly eight out of 10 investors are predicting below-trend growth over the coming year. The survey data indicates that investors will be more likely to commit cash when they see capex rising and stimulating economic growth.

Trading places in investors’ hearts: Banks and emerging markets

In the wake of the global financial crisis, banks were unloved and GEM were portfolio darlings. The reversal in sentiment between these two investments appears complete this month.

While allocations to GEM reached a record low, allocations to banks by respondents to the global survey have reached a record high. A net 28% said they are overweight banks, a significant swing since January when a net 16% were overweight.

One glimmer of hope for GEM is that the number of investors seeking to underweight the region in the coming year has eased slightly. A net 24% of global investors would like to underweight GEM in the next 12 months, down from a net 28% in January.

European equities at fever pitch

Optimism towards Europe has reached new highs. A net 40% of investors say that Europe is the region they most want to overweight. Europe has ranked as the most preferred region for six months. Belief continues to grow in Europe’s profit outlook. A net 12% of the global panel says that Europe is the region in which the profit outlook appears the most favorable, up from a net 8 percent a month ago.

Within Europe, a net 70% of respondents to the regional survey expect better profits in the year ahead – up from a net 59% last month. The number of European investors expecting double-digit earnings growth also increased.