Global investors boosted equity holdings to their highest in six months in October, even as world stock markets wobbled, and slashed cash levels to their lowest since February, a Reuters poll showed on Wednesday.
In the month before the US presidential election and despite some dour signals from the third-quarter earnings season, US stocks were most in demand as macroeconomic data stateside continued to produce some positive surprises.
As investors digested several weeks of dramatic monetary policy stimuli from the world's major central banks, the survey of 46 funds in the United States, continental Europe, Britain and Japan showed overall allocations to US equity rose to 49.2 percent - their highest since July.
Underlining the more confident tilt and the determination of major central banks to bolt interest rates to near zero, holdings of cash fell to their lowest level since February at 5.1 percent, as global equity allocations topped 50 percent for the first time since April. In addition, hopes rose that the worst of the euro zone sovereign debt crisis has passed with euro bond holdings within fixed-income portfolios rising to their highest since May. Big majorities of respondents expect Greece to remain in the euro by 2014 and say Spanish bond yields have now peaked. The continued equity build-up came as world stock markets recorded their first month in the red since May.
"The expected return on the equity asset class remains moderate on a six-month basis but it looks better than any other asset class - for instance cash, bonds or even alternative investments," said Natixis strategist Jean Patrick Dubrun. Funds remained evenly split about whether a victory in the November 6 US election for incumbent Democrat Barack Obama or Republican challenger would be better for global asset prices. However, some pointed out that US stocks typically perform well after an election regardless of the result.
But with a focus on the post-election "fiscal cliff" of looming tax rises and spending cuts, holdings of safe-haven US Treasuries within fixed-income portfolios suffered their biggest one-month drop since March and hit their lowest in five months. Uncertainty over how a new congressional constellation would deal with the "cliff" clouded many views and funds were also broadly split on whether a "clean sweep" of White House and Congress for either party would be good or bad for markets.
"It is generally perceived that 'gridlock is good' in Washington politics because gridlock keeps each party's more extreme legislative agendas in check and facilitates compromise," said Elke Speidel-Walz, chief investment strategist for Germany at Deutsche Bank Private Wealth Management. "However, this time gridlock could lead to a lack of compromise and force the US to go over the fiscal cliff, which would be negative for the economy and markets.
The recovery of the bond markets in Spain and Italy after the European Central Bank's promised support pushed overall euro debt holdings in bond portfolios to their highest since May as the debate about a Spanish bailout ebbed and flowed.
Underlying the better euro zone tone, 62 percent of the 35 funds who responded said they think Spanish sovereign yields - where 10-year rates hit highs above 7.5 percent in July - have already peaked for the current crisis. Some 76 percent of 31 funds who responded said they now expect Greece to remain in the euro by the end of next year.
Thanks to the Spanish and Italian bounce, government bonds globally recorded their biggest one-month jump in more than two years. "Seemingly open-ended actions by the European Central Bank and (U.S) Federal Reserve have appeared to lower tail risks," said Chris Paine, director of asset allocation at Henderson Global Investors.
Euro equity held most of September's gains, but remained well below 2011 averages. Japanese stock holdings, on the other hand, fell to their lowest level since December despite a fresh asset-buying stimulus from the Bank of Japan, while Asia stocks outside Japan rose to their highest since May, at 9.0 percent.
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