Global investors cut their US equity and bond holdings in January, a Reuters poll of fund managers showed on Friday, as the S&P 500 suffered its worst January since 2009 and after the US Fed began tightening. US stocks shrank 1 percentage point to 37 percent of asset managers' global equity portfolios, the lowest level in at least five years, against a backdrop of falling share prices that saw over $8 trillion wiped off global stock indexes.
Investors also cut their US bonds allocation by 2.4 percentage points to 35.8 percent of their global fixed income portfolios, the lowest since June 2014. The move followed a rate rise by the Federal Reserve in December and a spike in US high yield credit spreads as concerns mounted over the finances of energy companies.
The survey of 46 fund managers and chief investment officers in the United States, Europe, Britain and Japan was conducted between January 15 and 27. During this period, a collapse in oil prices to 12-year lows, heightened Chinese market volatility and worries about structurally low growth and high global debt sent investors stampeding for cover, pushing stocks deeper into bear market territory. "Clearly, global equity markets have been driven by panic and anxiety so far this year," said Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum.
Perhaps not surprisingly given this backdrop, investors raised their cash levels to 6.5 percent of their global balanced portfolios, the highest since June. Overall equity holdings fell only slightly to 47.6 percent, but this was the lowest level since September. But managers raised their exposure to alternatives, which include hedge funds, private equity and infrastructure, to 7.1 percent, the highest ever, in a search for less correlated returns.
Many investors expressed concern about the murky outlook for China. Policymakers there have unnerved markets due to perceived poor communication, and the implementation of measures intended to curb market volatility that had the opposite effect. "China is likely to continue to provide investors with intermittent cause for concern," said Boris Willems, a strategist at UBS Global Asset Management.
"Differentiating between developments in China's real economy and its often erratically moving domestic stock market - and assessing their potential impact on global asset prices -will remain key, however." Raphael Gallardo, an asset allocation strategist at Natixis, said a hard landing in China remained a risk, as this could force a big devaluation of the yuan, sending deflationary shockwaves across the globe. Other worries focused on central banks, with the US Federal Reserve on a tightening path. This is expected to reduce liquidity and add to dollar strength.
"Such an environment could lead to bouts of heightened market volatility, particularly if investments are crowded in a few popular trades, as was frequently the case in 2015," said Willems. While the European Central Bank and Bank of Japan remain in easing mode, some asset managers thought they were losing effectiveness in the face of very weak inflation. "They may fail to effectively curb market volatility in the medium term, as they did after the Great Financial Crisis," said Giordano Lombardo, chief executive and group chief investment officer at Pioneer Investments. "Financial markets have started to price in a very negative scenario."
However, given the extent of the selling, some managers said pockets of value were appearing in the more bombed out segments. "Now that the world's equity markets are officially in 'bear market territory' the opportunity for investors to buy quality stocks at much cheaper levels has arrived," Lowman said. Within their global equity portfolios, investors raised their UK equity allocation to 12.1 percent, the highest since December 2014, and their euro zone allocation to 18.8 percent.
They also raised their allocation to Asia ex-Japan stocks to 6.2 percent, suggesting that some emerging markets were beginning to look attractive due to their extremely depressed valuations. "If China does not derail in its transition process (and) developed markets remain resilient and avoid deflationary spirals, we believe the market over-reaction can open up value opportunities for long-term investors," said Lombardo.
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