Global funds cut U.S. equity holdings, raise cash: poll

[January 29, 2016]  By Claire Milhench

LONDON (Reuters) - Global investors cut their U.S. equity holdings and raised their cash levels in January, a Reuters poll of fund managers showed on Friday, as the S&P 500 suffered its worst January since 2009 and global stocks shed over $8 trillion.

U.S. stocks shrank 1 percentage point to 37 percent of asset managers' global equity portfolios, with U.S. equities down more than 7 percent this year.

A collapse in oil prices to 12-year lows, heightened Chinese market volatility and worries about structurally low growth and high global debt sent investors stampeding for cover in January, pushing stocks deeper into bear market territory.

"Clearly, global equity markets have been driven by panic and anxiety so far this year," said Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum.

The survey of 46 fund managers and chief investment officers in the United States, Europe, Britain and Japan was conducted between Jan. 15 and 27.

During this period, wild swings in stock markets and a blow-out in credit spreads encouraged investors to raise their cash levels to 6.5 percent of their global balanced portfolios, the highest since June.

Overall equity holdings fell only slightly to 47.6 percent, but this was the lowest level since September.

Many investors expressed concern about the murky outlook for China. Policymakers there have unnerved markets due to perceived poor communication, and the implementation of measures intended to curb market volatility that had the opposite effect.

"China is likely to continue to provide investors with intermittent cause for concern," said Boris Willems, a strategist at UBS Global Asset Management.

"Differentiating between developments in China's real economy and its often erratically moving domestic stock market - and assessing their potential impact on global asset prices -will remain key, however."

Raphael Gallardo, an asset allocation strategist at Natixis, said a hard landing in China remained a risk, as this could force a big devaluation of the yuan <CNY=>, sending deflationary shockwaves across the globe.

Other concerns focused on central banks, with the U.S. Federal Reserve on a tightening path. This is expected to reduce liquidity and add to dollar strength.

"Such an environment could lead to bouts of heightened market volatility, particularly if investments are crowded in a few popular trades, as was frequently the case in 2015," said Willems.

While the European Central Bank (ECB) and Bank of Japan (BOJ) remain in easing mode, some asset managers thought they were losing effectiveness in the face of very weak inflation.

"They may fail to effectively curb market volatility in the medium term, as they did after the Great Financial Crisis," said Giordano Lombardo, chief executive and group chief investment officer at Pioneer Investments. "Financial markets have started to price in a very negative scenario."

However, given the extent of the selling, some managers said pockets of value were appearing in the more bombed out segments.

"Now that the world's equity markets are officially in 'bear market territory' the opportunity for investors to buy quality stocks at much cheaper levels has arrived," Lowman said.

Within their global equity portfolios, investors raised their UK equity allocation to 12.1 percent, the highest since December 2014, and their euro zone allocation to 18.8 percent.

They raised their allocation to Asia ex-Japan stocks to 6.2 percent, suggesting that some emerging markets were beginning to look attractive due to their extremely depressed valuations.

"If China does not derail in its transition process (and) developed markets remain resilient and avoid deflationary spirals, we believe the market over-reaction can open up value opportunities for long-term investors," said Lombardo.

Within global fixed income portfolios, investors raised their euro zone bond holdings to 28.7 percent, the highest level since August 2015, and their Japanese bond holdings to 15.1 percent, betting on further easing from the ECB and BOJ.

But the U.S. bonds allocation was cut by 2.4 percentage points to 35.8 percent, the lowest since June 2014.

Within their global balanced portfolios, managers also raised their exposure to alternatives, which include hedge funds, private equity and infrastructure, to 7.1 percent, the highest ever, in a search for less correlated returns.

(Additional reporting by Maria Pia Quaglia Regondi; Editing by Toby Chopra)

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