LONDON U.S. equities’ share in global portfolios fell to the lowest in at least five years and U.S. bond allocations were also cut as nervous investors started readying themselves for the first Federal Reserve rate rise in almost a decade.
But while U.S. assets slipped from favor, investors were bullish on equities overall, as signs of economic recovery gathered momentum across the developed world, boosting allocation to Japanese and euro zone stocks.
The monthly Reuters survey of 47 fund managers and chief investment officers in the United States, Europe, Japan and Britain was conducted as it became evident that the Fed could raise U.S. interest rates as early as September.
Companies on both sides of the Atlantic have reported relatively robust results and U.S. economic growth accelerated in the June quarter thanks to solid consumer spending.
“We remain in an environment which should reward equity investment and allocations to a variety of other asset classes, which remain supported by satisfactory levels of economic growth, low interest rates and ample liquidity,” Mark Robinson, CIO of Bordier, said.
The poll found the average recommended allocation to equities in global balanced portfolios rose 1.5 percentage points from June to 49.8 percent, the highest since April.
Cash weightings fell more than a percentage point from highs hit last month when Greece appeared on the brink of default.
North American equity allocations were 39 percent in the average global portfolio, however, down 3.6 percentage points from June.
UK and European funds also cut back on U.S. and Canadian equities, with the former’s holdings at 26.6 percent, the lowest in at least three years and down from June’s 28.3 percent.
Reasons for the trepidation include U.S. share valuations which are looking increasingly exalted after three years of double-digit rises on Wall Street and also the dollar. Up 8 percent already this year, the greenback surge is cutting into U.S. multinationals’ profits.
UBS Global Asset Management has added more equity risk over the past month but its strategist Boris Willems said: “We maintain our preference for markets outside of North America where we see better valuations than in the United States, central banks on an easing cycle and weakening currencies, which should help exports and earnings.”
Euro zone allocations were steady at 19.3 percent of global portfolios but those to Japan jumped almost 3 percentage points to 17.1 percent. Tokyo’s Nikkei index has soared 18 percent so far this year, underpinned by solid earnings and the Bank of Japan’s bond-buying program.
But European prospects too seem brighter, with latest data showing confidence in the euro economy at four-year highs and inflation expectations rising for five months prior to July.
Another positive is Greece, which avoided default after a deal with creditors and is in talks over an 86 billion euro ($93.8 billion) bailout.
Koen Maes, global head of asset allocation at Candriam, saw the best opportunities in Europe. He noted better growth and positive earnings “thanks to higher confidence based on continuous monetary stimulation, weak euro, low oil and commodity prices and more stable political environment.”
Investors warn that Greece is not out of the woods, however, while additional risks are in China, where an equity rout has wiped $2 trillion off mainland markets’ value since mid-June.
BONDS
The growth uptick, along with U.S. and British policy tightening, made investors less enthusiastic about fixed income.
“We have seen some rotation out of bonds in recent weeks in favor of cash, clearly the imminent rise in U.S. rates, and possibly the UK, is unnerving global investors,” said Peter Lowman, CIO at Investment Quorum.
“It may be that further rotation out of fixed interest assets will happen over the coming months, and whilst cash might be used as a default over the short-term, it is likely that investors will use any weakness in equity markets to add to their position.”
The share of fixed income in global portfolios was steady at 35.9 percent, on a par with August 2014 levels, but allocations to U.S. debt continued to decline, falling to 37.7 percent, down 3 percentage points from June and the lowest since March.
Euro zone and Japanese bond allocations rose by 1 and 3 percentage points respectively, with Japanese funds increasing weighting to domestic bonds to 45.7 percent, a three-year high.
Funds were concerned about debt valuations, noting U.S. and German 10-year yields at 2.3 percent and 0.7 percent respectively. Euro periphery yields have also tumbled this month, with Italian yields set for their biggest one-day fall in over two years.
“We don’t believe that current low yields offer great value and expected returns are not sufficient to have a lot of bond investments as diversifying assets,” said Chris Paine, a fund manager at Henderson Global Investors.
(Additional reporting by Karin Strohecker, Jemima Kelly, Maria Pia Regondi and Reuters Bengaluru newsroom- Editing by Catherine Evans)
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