Global funds cut stocks, slowdown worries persist

Global investors cut their equity holdings in December and raised their exposure to bonds, a Reuters poll of fund managers showed last week, as worries about a global economic slowdown and uncertainty about the pace of Fed tightening persisted.

Equity holdings fell to 47.9%, the lowest since September, while bond holdings rose to 37.9%, the highest since December 2014, reflecting a generally cautious mood among asset managers.

“Risks are still in high leverage in China and some other emerging markets and also in uncertainty around the US tightening cycle and its impact on the US dollar,” said Joost van Leenders, chief economist in the multi-asset solutions team at BNP Paribas Investment Partners.

Giordano Lombardo, chief executive and group chief investment officer at Pioneer, said he was maintaining a cautious approach amid political risks, adding the possibility of tail risk events was on the rise.

The survey of 52 fund managers and chief investment officers in the United States, Europe, Britain and Japan was conducted between 14 and 21 December.

During this period, the US Federal Reserve raised interest rates by 25 basis points, its first increase since 2006, and signalled it would tighten further at a gradual pace in 2016.

Raphael Gallardo, asset allocation strategist at Natixis, thought that rate hikes were occurring too late in a cycle that was ‘already ebbing’.

“If the Fed hikes more than twice in H1 2016, it might trigger a downturn in H2, with potential financial tensions in equity and credit markets,” he said.

Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum, also identified the chance of a mild recession in the United States, or the mismanagement of US monetary policy, as key risks for 2016. Within their equity portfolios, asset managers trimmed their exposure to US stocks by two percentage points to 38%, the lowest level since September. Euro zone equities were cut back to 18%, the lowest since January 2015. Early in December the European Central Bank failed to meet the market’s expectations for all-out monetary easing, triggering a sell-off in European equities. The FTSE Eurofirst index is down almost 7.7% month-to-date.

Investors raised their Japanese equity allocation to 20.6%, the highest level since November 2014, following a decision by the Bank of Japan to reorganise its massive stimulus program in an attempt to boost investment.

“With cash yields close to zero almost everywhere, we feel that markets still offer much better investment prospects ...as we head into 2016,” said Steven Steyaert, a senior portfolio specialist at NN Investments.

“Resilience in developed markets’ domestic demand will remain a steady anchor for the global economy in the coming quarters.”

Within their bond portfolios, investors trimmed exposure to the US to 38.2%, the lowest since August, and euro zone holdings to 26.1%, the lowest since September.

Asset managers raised their UK bond holdings to 12.8%, the highest level since December 2014. The US rate rise was broadly interpreted as clearing the way for a similar move by the Bank of England, albeit not right away. UK interest rates have been at a record low 0.5% since 2009. The next Bank of England rate announcement is due on 14 January.

Signs of capitulation

Investors remained split over whether it made sense to return to emerging markets in 2016 following a terrible performance in equities this year.

The benchmark emerging stocks index has sold off by almost 17% year-to-date and asset managers cited worries about a worsening economic picture in China and rising political risk, such as tensions between Russia and Turkey.

At the same time commodity prices have collapsed, undermining the economies of the big commodity exporters.

Oil prices are down at around $ 36 a barrel – the lowest in more than 11 years – following OPEC’s decision to maintain production at its December meeting.

Meanwhile, copper slipped to a 6 1/2-year low in November before rebounding slightly in December.

“There are signs of capitulation in commodities and emerging markets, though these remain an investment only for (those) with a high risk/reward tolerance,” said Rob Pemberton, investment director at UK-based HFM Columbus.

But Nadege Dufosse, head of asset allocation at Candriam, said they had become more positive on Asian countries. “We think that the slowdown in growth is integrated in expectations and the bottoming out of commodities should help the improvement of global sentiment,” she said.