By Ingrid Melander
LONDON, June 12 (Reuters) - Investors raised their cash holdings to the highest level in more than three years in June on concerns over the euro zone and global growth, and they also slashed their equity allocations, a closely watched fund managers' survey showed on Tuesday.
Investors, who cut their European equity allocations to the lowest level since last September and commodities to the lowest since early 2009, widely expect central banks to step in to stem the crisis, the monthly survey by Bank of America/Merrill Lynch
"It's definitely a risk-off month and closing in on a risk of capitulation," said Gary Baker, head of European equity strategy at Bank of America Merrill Lynch.
"Why are we not at the capitulation stage yet? I'd put it down to the expectation of policy response," Baker said. "It's not just hope but a firm expectation that there will be a policy response from the central banks."
Average cash levels stood at their highest since the start of the euro zone debt crisis at 5.3 percent of portfolios compared to 4.7 percent in May, and the gap between euro zone and U.S. equity allocations jumped to its widest on record.
"Cash has been steadily accumulating (in recent months) but to see it spike to this level illustrates the difficulties investors are having," Baker added.
The overwhelmingly risk-off mood pushed investors to swing to net 4 percent underweight on global equities, versus a net 16 percent overweight in May and a net 28 percent in April. That was despite the fact that almost half see equities undervalued.
In Europe, fund managers polled said euro zone equities had never been cheaper and were in fact cheaper than any other region in the past.
The global survey of 260 investors managing $689 billion in assets found that nearly three in four expect the European Central Bank to proceed with another liquidity operation in the next four months.
That is up from less than one in two in May, while 44 percent expect another quantitative easing from the U.S. Federal Reserve in the third quarter.
"A lot of investors are sitting on their hands waiting for a policy response, and until that is evident investors are content to sit on the sidelines waiting for that event," Baker said.
The survey, conducted May 31-June 7, before the euro zone agreed to bail out Spanish banks, showed that two-thirds of fund managers see the EU sovereign debt crisis as the biggest tail risk and even see a risk of a negative surprise from Germany.
The poll showed a sharp decline in growth expectations, with a net 11 percent of the global panel forecasting that the global economy will deteriorate in the next 12 months, while last month a net 15 percent expected the economy to strengthen.
Allocations to bonds rose, with a net 23 percent of fund managers underweight fixed income compared to 33 percent in May.
While most investors are convinced of a soft landing for the Chinese economy, the flight to cash saw them scale back their long-standing overweight on emerging equities to just 17 percent, half of last month's level, the poll showed.
(Additional reporting by Sujata Rao)
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