European fund managers lifted cash levels to a 1-1/2 year high in March and cut equity holdings as they shunned riskier assets in response to rising geopolitical tensions and rich valuations, a Reuters survey showed on Monday. Investors boosted holdings of both European bonds and equities to their highest levels in more than three years, the monthly poll of 19 asset managers in continental Europe showed.
The survey was conducted from March 19 to 27, as Western governments mulled imposing tougher economic sanctions on Russia over its annexation of Crimea and the Federal Reserve hinted at an early interest rate hike, causing some volatility in the market. "The likely resurfacing of risk aversion, in the wake of geopolitical crises such as the one involving Russia and its neighbours, may provide some downside," said Monica Defend, head of global asset allocation research at Pioneer Investments.
Cash levels within the model portfolio rose to 10.2 percent, the highest since August 2012. Bond holdings rose to 37.2 percent, their highest since October, at the expense of the equity weighting, which fell to 46.9 percent, the lowest since June. MSCI's broad measure of European stocks is up 1.6 percent this year after a 21 percent rally last year. But some European stocks most sensitive to emerging economies have fallen by 0.3 percent since January.
Investors pushed euro zone equity holdings to 34.6 percent, the highest since October 2011, while the region's bond holdings rose to 62.8 percent, levels not seen since September 2011. The increase comes as the region's economic recovery gathered momentum despite sluggish price rises. Spanish, Italian, Portuguese and Irish bond yields fell to new multi-year lows in the past week.
"On the fixed income side, we keep our overweight in high yield bonds and selected sovereign markets such as Italy, UK and Australia," said Boris Willems, strategist at UBS Global Asset Management. "The situation in Ukraine is a good reminder for investors to accept higher volatility, as negative news is starting to weigh heavier on market sentiment, due to rich valuations in certain equity markets."
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