France's President Nicolas Sarkozy speaks to guests at a reception celebrating the Chinese New Year, the Year of Tiger, at the Élysée Palace, Paris, Tuesday Feb. 16, 2010.

Fund managers are positioning themselves for halts in both Europe and China's economic recovery, according to the Bank of America Merrill Lynch Survey of Fund Managers for February. The popularity rating of European banks dropped from 16 per cent in January to minus 53 per cent in February, the biggest monthly fall in the survey's nine-year history.

Investors have scaled back their growth expectations, retreated into cash and are increasingly skeptical that the European Central Bank (ECB) will increase interest rates in 2010. The panel was responding to questions against a backdrop of economic crisis in peripheral Eurozone countries and concerns over monetary tightening in China. World equity markets fell by 8.9 per cent during the survey period.

The proportion of European investors expecting the region's economy to grow in the coming 12 months has fallen to 51 per cent from 74 per cent in January, and the proportion expecting no rate rise by the ECB in 2010 has soared to 45 per cent from 19 per cent. Globally, 42 per cent of respondents now see no rate hike by the U.S. Federal Reserve before 2011, up from 27 per cent.

Risk aversion returned with average global cash balances rising to 4.0 per cent from 3.4 per cent in January. Hedge funds have scaled back leveraged to less than one times from 1.33 times. Europeans poured out of financial stocks amid fears of exposure to troubled economies. Global investors now say Europe is the region they would most like to underweight.

"Investors are questioning whether this is a pause in growth or a trend reversal. We believe it's the former," said Gary Baker, head of European Equities strategy at BofA Merrill Lynch Global Research. "Concern over European sovereign debt and Chinese tightening means the level of U.S. dollar bulls is at a 10-year high, and banks are once again the least loved global sector," said Michael Hartnett, chief Global Equities strategist at BofA Merrill Lynch Global Research.

Concerns prompt asset re-allocation

The starkest monthly change has been a shift back into cash. A net 12 per cent of global asset allocators are overweight cash, the highest since June 2009 and in contrast to a net 8 per cent underweight in January.

Equity positions are sharply down. A net 33 per cent say they are overweight equities, down from a net 52 per cent in January. There's been a moderate move back towards bonds. A net 39 per cent of asset allocators are underweight bonds, down from a net 52 per cent a month earlier. Nonetheless investors still prefer growth sectors such as tech, energy and industrials.

Commodities, dependent on Chinese demand, have fallen in popularity with a net 10 per cent of global investors overweight the asset class, down from a net 23 per cent. However, following a 9 per cent fall in the oil price, during the survey period, a net 18 per cent now see crude as undervalued.

Fears surface over Chinese growth

Belief in China's continued economic growth has fallen at the fastest rate ever recorded by the survey. Just 7 per cent (net) of the global panel expect China's economy to strengthen in the coming 12 months – down from a net 51 per cent of respondents a month earlier and the lowest reading since March 2009. This turnaround followed the decision to increase Chinese banks' reserve ratio requirements.

"At least in terms of investor growth expectations, China has experienced a 'double-dip'," said Michael Hartnett.

Banks take brunt of equity sell-off in Europe

European investors responding to the BofA Merrill Lynch Survey of Fund Managers have dramatically reduced exposure to banks in the past month.

More than half of respondents (53 per cent) are underweight bank stocks compared with 16 per cent in January, a monthly swing of 37 per cent and the highest underweight since March 2009. Even after the sell-off a net 14 per cent of the regional panel believes banks are overvalued.

"What's happened in Greece has prompted questions about banks' lending positions and exposure to other peripheral economies. There's also a fear that banks' cost of capital will rise," said Gary Baker. The banking sell off was concentrated in Europe, however. U.S. investors actually reduced their underweight positions. A net 24 per cent are underweight banks, down from a net 38 per cent in January.

Many investors are moving back into cash as the growth prospects for Europe have weakened, according Gary Baker from BAS-ML Global Research: