UK equity allocation has fallen to its lowest level since 2008, with fund managers rating a Brexit as the biggest tail risk for markets, according to the latest Bank of America Merrill Lynch survey.
The survey found global fund managers have cut their UK equity allocation from a 20% average underweight last month, to a current 36% average underweight.
The results also show sterling is currently seen as undervalued by 20% of fund managers, the second highest reading on record, as the upcoming EU referendum continues to weigh on the UK currency.
Manish Kabra, European equity quantitative strategist, said: "Investors identify Brexit as the biggest tail risk in the world, with global fund managers' allocations to UK equities dropping to the lowest levels in 7.5 years."
However, 71% of investors polled by BofAML still think a Brexit is unlikely or not at all likely.
Meanwhile, global growth expectations rose to 15% in May from 10% in April, although this still falls well below the 50%-60% readings seen early last year.
Chinese growth expectations fell sharply, with 50% of investors expecting a weaker economy in the country, up from 22% in April.
Despite this, allocation to emerging market equities turned positive for the first time in 17 months, with 2% of fund managers reporting an overweight position.
Nearly 40% of investors expect the European economy to strengthen over the next year, up from 6% last month, while 86% say they do not expect a European recession.
Meanwhile, negative interest rates and a lack of central bank stimulus have led Japanese equity allocation to fall to its biggest underweight since December 2012, at a 6% net underweight.
Michael Hartnett, chief investment strategist, said: "Although global growth expectations rose slightly from the previous month, investors continue to hold elevated cash levels to protect against potential shocks from Brexit, China and quantitative failure."
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