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 Fund managers polled by Reuters in the United States, Europe,
Britain and Japan raised cash allocations to 6 percent in May, the
highest level since January when global equity markets were in
free-fall. They also increased their bond exposure to 37.8 percent
from 37.6 percent in April.
The monthly poll showed that investors trimmed their equity
allocation to 46.4 percent, citing worries about Britain's June 23
referendum on membership of the European Union, and the growing
expectation that the U.S. Federal Reserve would raise interest rates
in June or July.
"Over the short term, the greatest risk is a Brexit," said Nadege
Dufosse, head of asset allocation at Candriam, arguing that while
the strongest impact would be on euro zone and UK equities, a global
"risk off" move was also likely.
"Brexit risk is at the top of our geopolitical concerns and we
believe it may have a material impact on European risk assets,"
agreed Giordano Lombardo, group chief investment officer and chief
executive of Pioneer Investments.
"We prefer to keep a cautious stance."
The survey of 58 fund managers and chief investment officers was
conducted between May 16 and May 25.
During this period, online and telephone polls of UK voter
intentions for the upcoming referendum on EU membership have given
differing accounts of support for the 'Leave' and 'Remain' camps.
This has clouded the view for investors, especially with a
significant number of voters seemingly still undecided.
In the Reuters asset allocation poll, 20 out of 22 respondents who
expressed a view thought that a victory for the 'Leave' camp would
have repercussions beyond UK markets, hammering European stocks and
the euro.
Several respondents worried that a vote to leave could set a bad
precedent, bolstering anti-EU forces across the continent.
"Both European equities and the euro will face a major structural
challenge that will undermine the foundations of the integration
process in Europe," said asset allocators at Unigestion.
Although some managers thought that downside risks were already
factored in, others, such as Peter Lowman, chief investment officer
at UK-based wealth manager Investment Quorum, reckon financial
markets are still underplaying Brexit risks.
"Short term, an exit is likely to affect global market sentiment,"
he said, adding this could explain the reduction in equity exposure
of the last few weeks.
HAWKISH FED?
Investors are also cautious as the U.S. Federal Reserve is expected
to raise interest rates this summer following more hawkish comments
from Fed policymakers in recent days, and an improvement in U.S.
economic data.
As recently as early May, a Fed rate hike in June seemed off the
agenda, but that probability now stands around 26 percent, according
to the CME Group's FedWatch calculator, while market participants
see a 50-50 chance of a July move.
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As the Reuters poll was carried out during the period when Fed
policymakers were signaling a more hawkish stance, it is perhaps not
surprising that 87 percent of respondents who expressed a view
expected the Fed to raise rates in 2016 after standing pat since
December.
"We expect a June or July rate hike with another toward the end of
the year," said Trevor Greetham, head of multi-asset at Royal London
Asset Management.
"The U.S. economy is picking up again according to business surveys,
the unemployment rate is low and inflation is likely to rise in the
second half of the year on oil price base effects."
Some investors expressed fears that Yellen may have to tighten
policy more quickly than expected if U.S inflation begins to pick up
in earnest.
ON EDGE
Within global equity portfolios, investors raised U.S. equity
exposure to 39 percent, the highest since November 2015, and held UK
equities steady at 11.1 percent.
They cut Japanese stock holdings by 2.7 percentage points to 18.1
percent, the lowest since November 2015, whilst slightly raising
euro zone equities to 18.8 percent.
However, fund managers said it was difficult to get too bullish given sluggish
economies and volatile politics in emerging and developed markets.
"We have a backdrop of rather modest corporate profitability, and valuations in
some sectors or markets which appear quite fully valued," said Mark Robinson,
chief investment officer at wealth manager Bordier & Cie (UK). "It is therefore
not surprising to see markets on edge."
Developed stocks have had a decent run since the February trough, and in May the
S&P 500 <.SPX> is up around one percent and European equities <.FTEU3> have
risen almost two percent. But emerging markets <.MSCIEF> are faltering, having
shed more than 3 percent in May.
"We don't see many catalysts for further sustained rallies of risk assets in
this phase," said Pioneer's Lombardo. "Global economic growth is decent, but not
impressive, and fiscal policy, which could be a positive catalyst, is still too
timid."
(This story fixes attribution of quote in paragraph eleven)
(Additional reporting by Maria Pia Quaglia Regondi)
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