European investors build up bond holdings in December

European investment managers built up their holdings of bonds and cut back on riskier assets such as stocks in December, eyeing the threat of market volatility and an uncertain year ahead beset with unseen risks, a survey shows. A Reuters poll of 17 Europe-based investors found the average recommended allocation to equities in global balanced portfolios fell to 43.6 percent from 47.1 percent a month earlier.
In contrast, bond allocations rose nearly two percentage points to 37.8 percent, the survey showed. Bonds are seen as relative safe havens when investors become risk averse. Equities are typically more volatile and gain favour at times of rising optimism.
However, the European Central Bank is poised to carry out rounds of monetary stimulus - including a bond-buying programme known as quantitative easing - which is likely to bolster bond markets. Cash holdings were 7.8 percent, and many investors appeared to buy into a real estate recovery. Property exposure rose to 3.7 percent on average from less than 1 percent a month earlier.
Risks identified by poll respondents include policy mistakes by monetary authorities, such as mis-timed interest rate hikes that could hamper fragile economic recoveries. "Out of sync central banks and commodities price dynamics are likely to be the macro themes from which we will derive our investment consequences, being aware of some volatility ahead. Cautiousness and punctual portfolio risk management will drive our investment choices," said Monica Defend, global head of asset allocation research at Pioneer Investments.
Many investors also highlighted geopolitical risk as a major concern as the standoff between the West and Russia over the conflict in eastern Ukraine continues. However, some investors said they remained bullish for 2015 and have used recent bouts of market volatility to buy equities at relatively cheap valuations. Boris Willems, a strategist at UBS Global Asset Management, said he expects global growth to continue through 2015, led by economic recovery in the United States. Monetary easing in Europe would benefit developed market equities, European bonds and the US dollar, he added. "However, some headwinds remain, namely missteps in central bank communication or an escalation of the Ukraine crisis with tougher Russia sanctions that could potentially further harm the German economy," he said.