China funds raise equity weighting to record high

Mutual funds in China have raised their recommended equity weighting to a record high, betting ample liquidity at home and abroad will push stock prices higher, the latest monthly Reuters poll of fund managers shows. However, the stock market still faces policy risks because if inflation spirals out of control, the government could take tougher measures to tighten liquidity, some fund managers said.
The suggested equity weighting over the next three months rose to 88.9 percent, the highest level since the poll was initiated in 2007, from 83.6 percent last month, according to the poll of nine China-based funds taken between October 22 and October 29.
Suggested allocations for bonds were cut to a record low of 2.4 percent, from 3.1 percent last month, while exposure to cash was slashed to a two-year low of 8.7 percent, from 13.3 percent a month earlier. China's benchmark Shanghai Composite Index staged an unexpectedly strong rally in October, having jumped nearly 12 percent so far this month, on expectations that fresh monetary easing by the Federal Reserve would flood the global financial system with liquidity.
A Shanghai-based fund manager said that ample liquidity available to flow to stocks - supplemented by hot money inflows betting on yuan appreciation and by speculators fleeing a tightly-regulated real estate market - will continue to push up asset prices over the next month, despite threats of further tightening measures such as another interest rate increase.
Fund managers expected the benchmark index to range between 2,900 and 3,500 points in the next three months, compared with the previous poll's range of 2,500 to 2,900 points. On average, they project the index to reach 3,246 points by the end of January.
Within an equities portfolio, the suggested weighting for financial shares was raised to 13.9 percent from 10.3 percent a month earlier, while those for metal and energy stocks rose by 2.1 and 3.9 percentage points respectively, to 8.9 percent and 10.6 percent.
The suggested allocation for consumer stocks was cut sharply to 22.7 percent from last month's 31.4 percent, although it remains the most popular sector in fund managers' portfolios.
By early afternoon on Friday, the main stock index was down 0.7 percent at 2,970 points, as the market appears to be pausing for a rest following the rapid rebound earlier in the month.