Global funds recommended a cut in equity holdings this month and an increase in bonds allocations to the highest since August 2017, a Reuters poll showed, reflecting a generally cautious mood among long-term investors. That was despite a rally in equities, with the S&P 500 index setting an intra-day record high on Monday amid hopes of a resolution to the US-China trade war, upbeat earnings and a dovish Federal Reserve. That has bolstered views the decade-long bull market has further to run.
But fund managers and chief investment officers in the United States, Europe, Britain and Japan polled by Reuters warned most asset prices look expensive, an issue increasingly weighing on market sentiment, given the abundance of risks.
In the latest survey of 36 fund managers conducted April 17-30, global equity allocations accounted for 47.0 percent of the model portfolio from 47.6 percent in March.
Bond holdings were increased to the highest since August 2017, to 40.5 percent from 39.8 percent, also at the expense of cash, which was cut to 5.2 percent from 5.8 percent.
"Risky assets extended the rally in April. (But) valuations are getting more expensive across the board, with volatility falling to the lowest level in six months," said Filippo Casagrande, head of investments at Generali Investments Partners.
"Given the still-unconvincing signs of an economic rebound in the euro area and softer data in the US, we confirm a neutral stance on risky assets." Against conventional wisdom, stock and bond prices have broadly risen in tandem over the past several years, driven by large amounts of cash poured in by major central banks, leaving most asset classes looking stretched.
Key central banks have recently hinted at a move away from hiking rates, and nearly 60 percent of more than 200 economists in a separate Reuters poll said they were confident the global tightening cycle was now over. That is likely to keep equity markets buoyed.
"The Fed's dovish pivot means the rally has longer to run. US President Donald Trump will keep the pressure on Fed Chair Jerome Powell to cut interest rates, which will fuel the equity markets to record highs," said Christopher Peel, chief investment officer at Tavistock Wealth.
A majority of fund managers who answered an additional question said they would roughly maintain their current risk positioning over the next six months, suggesting average equity allocations will remain relatively modest given where indexes are trading.
"Our view is that markets are moving towards over-bought levels and prices have moved ahead of economic fundamentals. Granted there have been some green shoots of economic growth, but the price moves are not consistent with mediocre growth and stagnant corporate earnings," said Rory McPherson, head of investment strategy at Psigma.
Funds have retained a significant exposure to government bonds in spite of low yields and high valuations. That suggests the multi-decade long bull run in the global bond market is not over and dovish central banks would mean interest rates remaining "lower for longer". Within bond portfolios, investors increased North American exposure to the highest in nearly four years.
"Given the uncertainties in the outlook for growth, we continue to favour the US Treasury market versus other major government bond markets because Europe and Japan are largely asymmetrically priced for a recession," said Colin Harte, head of research, multi asset solutions at BNP Paribas Asset Management.
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