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.
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"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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