Global funds raise U.S. equity holdings, eye emerging markets for 2016 bounce

[November 30, 2015]  By Claire Milhench

LONDON (Reuters) - Global investors raised allocations to U.S. and British equities in November and lifted weightings of selected emerging market assets to multi-year highs as some managers positioned for a potential rebound in the sector.

The survey of 50 fund managers and chief investment officers in the United States, Europe, Britain, Japan and China was conducted between Nov. 17 and 26.

During this period, U.S. Federal Reserve officials strongly hinted that markets should expect an interest rate increase in December, its first since 2006. Mario Draghi, president of the European Central Bank, meanwhile indicated the ECB was ready to expand monetary easing at its Dec. 3 policy meeting.

Investors remained relatively bullish on the outlook for risk assets, keeping overall equity holdings steady in November at 48.2 percent in global portfolios. Bond holdings rose one percentage point to 37.4 percent while cash was cut to 5.4 percent from 6.3 percent in October.

Matteo Germano, global head of multi-asset investing at Pioneer, highlighted risks around China, emerging markets and the Fed as it exits almost a decade of near-zero interest rates. But he remains positive nevertheless.

"We believe that amid all the structural risks which are still present ... the drivers of a cyclical uptrend continue to be in place," Germano said.

This sentiment was most apparent within asset managers' equity portfolios, where they raised their U.S. holdings to 40.2 percent, up from 38.5 percent in October.

The S&P 500 <.SPX> rallied hard in October, ending the month 8.3 percent higher. It was unable to repeat the stellar performance in November, adding only half a percent, but investors remain upbeat about the outlook for the U.S. economy.

"Momentum is positive in the U.S.," said Germano. "Growth is more widespread and robust, and improvements in the labor market will likely continue to support internal demand."

Peter Lowman, chief investment officer at Investment Quorum, a UK-based wealth manager, predicted that any upside surprises in global growth would be positive for equities and identified the United States and the euro zone as potential beneficiaries.

Investors also raised their UK equity holdings to 11.2 percent -- the highest since May 2015 -- and kept their euro zone equity allocation steady at 18.6 percent.

BOTTOMED OUT EMERGING MARKETS

One of the most notable moves this month was a thaw in sentiment towards emerging markets. Investors raised emerging Europe equity holdings to 2.5 percent, the highest since May 2011, whilst Asia ex-Japan equities increased to 6.5 percent.

Emerging stocks <.MSCIEF> have lost 14 percent this year and have not made a positive return for investors since 2012. Some managers take the view the market has now bottomed out and are seeking opportunities where assets look over-sold.

"Clearly, emerging markets have suffered the most over recent months which has now led to pockets of value appearing, especially in those countries less affected by the collapse in commodity prices," said Lowman.

"Therefore, selective countries within EM could be an area of investor interest as we enter 2016."

Emerging Europe is thought likely to receive a boost from any extra ECB stimulus, as those economies are closely linked to recovery in Western Europe.

Meanwhile, Asia's manufacturing hubs too should benefit from persistent low oil prices and any pick up in U.S. consumer spending. U.S. durable goods orders rose 3 percent in October from a month earlier.

Investors continued to steer clear of Latin American equities, however, cutting their exposure there to 1.1 percent, the lowest ever recorded by the Reuters poll.

Brazil remains a big drag on performance for Latin American equities, amid concerns that efforts to fight corruption in the region's largest economy could derail efforts to address problems with the country's finances.

Within fixed income portfolios, asset managers trimmed U.S. bond holdings slightly to 38.3 percent while UK bond holdings fell to 9.8 percent, the lowest since May 2015.

But investors ramped up Asian ex-Japan bond holdings from 2.6 percent in October to 4.5 percent, the highest allocation since the Reuters poll began.
 

Some managers remained cautious about jumping back into these waters, however, despite attractive valuations.

Chris Paine, multi-asset fund manager at Henderson Global Investors, said local currency emerging market debt was starting to look cheap on a relative basis.

"But a significant portion of this is accounted for by currency volatility," he said. "We believe the yields on offer for hard and local currency EM debt don't offset the credit risk that the underlying indices entail."

(Additional reporting by Maria Pia Quaglia Regondi; Editing by Catherine Evans)

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