LONDON – Although investors have been pulling their money out of riskier assets since mid-May, evidence is growing that they have done so in a way that could allow for a swift change of mind. Cash allocation is at a high. Reuters’s end-June asset allocation polls showed an average holding of 5 percent in portfolios, the highest level in more than a year. More recently, Merrill Lynch’s July poll of fund managers, released on Tuesday, showed 43 percent overweight in cash versus just 13 percent underweight. The net difference between the two has not been surpassed since the period immediately following the September 11, 2001 attacks. While high cash levels reflect extreme caution among investors – the Merrill poll was unusually bearish, as have been other sentiment indicators – they also represent a temporary hiding place for investors when uncertainty is rife. From there, investors can quickly shift into longer-term investments when things change or a degree of certainty returns. «That cash is just waiting to come back in,» said Mike Lenhoff, chief strategist at wealth manager Brewin Dolphin Securities. «It is very unlikely (investment houses) will remain liquid for long. They are looking for buying opportunities.» David Bowers, Merrill’s poll consultant, says the high levels of cash, along with other pessimistic factors, such as risk aversion, could even be a contrarian signal to buy riskier assets. They are, he said, «the raw ingredients» for a stock market rally. Toe dipping Given the number of investors who are bearish about the environment of the financial market, it would indeed be contrarian to start talking about a renewed love affair with risk. Some analysts, however, have noted a tentative willingness on the part of some investors to try out the waters. Jeremy Armitage, global head of research at State Street Global Markets, said movements of money within the firm’s $10.7 trillion in custodial assets suggest some risk aversion may be waning, especially in currencies. «People do seem to be putting money back into the (carry) trade, albeit slowly,» he said, referring to investors seeking returns from higher-yielding currencies. At the same time, Emerging Portfolio Fund Research reports that there were $1 billion in net inflows to the emerging market equity funds it tracks in the week to July 12, the first net inflows in eight weeks. There were also net inflows into emerging market bond funds for the first time in seven weeks. In the meantime, there is scant evidence that investors have been turning to super-safe government bonds during the equity market falls and risk withdrawals that have shaken them on and off since mid-May. Merrill’s poll showed 70 percent of fund managers were underweight in bonds, the same as for May and June, and yields on major government debt have risen back to mid-May levels despite escalating Middle East violence and economic worries. «(Investors) are not yet willing to go back into bonds even with a 5 percent yield,» Merrill’s Bowers said. Headwinds For now, however, most of the uncertainties that have driven investors away from riskier assets remain in place. Key among them is concern about the US Federal Reserve’s intentions with interest rates. Investors want to know how high rates will go, not just because of fears of liquidity withdrawal but also because of worries that the Fed will overreach and cool the global economy too much. There are similar concerns about the risk of a hard landing for China’s economy. Add to these the soaring oil prices that have accompanied the Israel-Lebanon crisis, although many investors believe the global economy can handle prices well above the $78 a barrel reached last week. But given the positioning of many global investors – still generally favoring stocks, eschewing bonds, holding large cash coffers and wanting to find rewarding opportunities – a little clarification on the future could go a long way. «It wouldn’t take much in the sense of good news to pack a punch and send (riskier) markets flying,» Brewin Dolphin’s Lenhoff said.