Global funds raise bonds,
cite political uncertainty: Reuters poll
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[November 30, 2016]
By Claire Milhench
LONDON
(Reuters) - Global investors raised their bond exposure and held cash at
high levels in November, citing uncertainty around U.S. President-elect
Donald Trump's plans and worries about political risk in Europe, a
Reuters monthly poll showed on Wednesday.
Although Trump's promises to cut taxes and boost spending have pushed up
bond yields on the expectation of higher inflation, some poll
participants wanted to see if he would actually implement these
expansionary policies before making big changes to their portfolios.
Global bond markets have sold off in the wake of Trump's election,
wiping out more than $1 trillion in a two day rout. U.S. two-year
Treasury note yields <US2YT=RR> have risen to 6-1/2 year highs and U.S.
10-year Treasury yields <US10YT=RR> are set to end November with their
biggest monthly rise since December 2009.
But the poll of 45 fund managers and chief investment officers in
Europe, the United States, Britain and Japan showed bond holdings rising
to 40.7 percent of global balanced portfolios, up from 39.9 percent in
October. The survey was carried out between Nov. 18 and 28.
Some poll participants, such as Mouhammed Choukeir, chief investment
officer at Kleinwort Hambros, said they retained a significant exposure
to government bonds in spite of record low yields and high valuations.
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This was mainly to diversify away from equity risk, but Choukeir noted
that government bonds had delivered excellent returns over the last one,
three and five-year periods through conditions similar to today – a
surprise to many. "It is more than possible that they will continue to
surprise," he said.
Although 65 percent of respondents who answered a question on the global
bond market thought the multi-decade long bull run was over, several
argued that with the European Central Bank, Bank of Japan and Bank of
England still buying bonds, rates would remain "lower for longer".
REFLATION VS DEFLATION
Others, such as Matteo Germano, global head of multi-asset investments
at Pioneer Investments, favored inflation-linked bonds in the United
States, euro zone and Japan.
"Reflation trends make a flexible and unconstrained approach to fixed
income paramount," he said, adding that there were still areas of value
in high yield and investment grade bonds. "We still don't see a massive
rotation out of fixed income."
Indeed, some managers were skeptical about whether Trump would actually
deliver on his promises and whether this merited an immediate switch out
of deflation trades such as bonds and into inflation plays such as U.S.
small cap stocks.
"Trump could have been the catalyst to spur higher inflation, higher
real rates. But as yet it is too early to say," said Sacha Chorley, a
portfolio manager at Old Mutual Global Investors. "We will have more
clarity when his policies actually get revealed in January."
Others, such as Peter Lowman, chief investment officer at UK-based
wealth manager Investment Quorum, expressed concerns about upcoming
elections in Germany, France, the Netherlands and Austria, given that
populism is on the rise.
With the Italian referendum on constitutional change due on Dec. 4, he
warned that "further shock results" were possible after Brexit and
Trump. But he added there was still a "sizeable amount of money on the
sidelines" waiting to come in if markets got oversold.
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![](../images/113016PICS/busine17.jpg)
Traders work on the floor of the New York Stock Exchange (NYSE) in
New York City, U.S., November 10, 2016. REUTERS/Brendan McDermid
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In the poll, cash levels were steady at 6.6 percent of global balanced
portfolios, suggesting investors were keeping their powder dry, whilst
equity holdings were steady at 44.1 percent.
Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM),
said he had reduced his equity overweight ahead of the U.S. presidential
elections but had bought again in the immediate aftermath when
uncertainty triggered a sell off.
Greetham thought Trump's reflationary policies could accelerate a pick
up in global growth, benefiting stocks at the expense of bonds. But he
added: "There remain many important unknowns as to how a Trump
presidency will operate and the market may be volatile for a while."
FED RATE HIKES
Just over 80 percent of respondents who answered a question about the
trajectory of U.S. rate rises thought the Federal Reserve would hike
rates just twice in 2017, given the length of time it might take Trump
to get his legislative program through Congress.
"We expect the Federal Reserve initially to be cautious about raising
interest rates for most of 2017 while they assess the outcome and full
impact of the fiscal package," said Andrew Milligan, head of global
strategy at Standard Life Investments.
"If it is a sizeable package, however, leading to further pressures on
wages and inflation into 2018, then we would expect the Fed to become
rather more aggressive into 2018, eventually moving once a quarter."
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Within global equity portfolios, investors raised exposure to Japan
almost one percentage point to 18.2 percent, the highest since April
2016. Japanese firms, particularly consumer goods exporters, usually
benefit from dollar strength.
The dollar <.DXY> is near 14-year highs against a basket of currencies,
whilst the Nikkei <.N225> is up 5 percent in November, following a 6
percent rise in October.
(Additional reporting by Maria Pia Quaglia Regondi, Hari Kishan and
Dhara Ranasinghe; Editing by Andrew Heavens)
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