European funds raised their exposure to euro zone bonds and equities in January after the ECB hinted strongly that further easing could be on the way and European stocks plunged more than 20 percent, a Reuters poll showed on Friday. The poll of 18 European asset managers was conducted between January 15-27, coinciding with the European Central Bank meeting at which President Mario Draghi said the bank would need to be ready to use any instrument to combat the deteriorating economic outlook.
Investors interpreted this to mean that further stimulus measures were likely, such as a cut in the deposit rate or an increase in the bank's monthly asset purchases. Within their global fixed income portfolios, asset managers increased their euro zone bond holdings by more than 5 percentage points in January to 55.8 percent, the highest level since October 2015.
They also boosted exposure to euro zone stocks slightly to 35 percent of their global equity portfolios. "Risk assets should remain supported by the ECB's accommodative monetary policy, euro and oil price weakness, as well as the potential for corporate earnings growth to gather momentum," said Boris Willems, a strategist at UBS Global Asset Management.
Asset managers cut exposure to US bonds by around 4 percentage points to 20.8 percent, the lowest level since June 2015. This followed the US Federal Reserve's decision to raise interest rates in December, its first hike in nine years. Willems said US tightening increased the likelihood of a more liquidity-constrained investment environment in the year ahead. This could lead to bouts of heightened market volatility, particularly if investments were crowded in a few popular trades, as was often the case in 2015.
Nearly $8 trillion was wiped off global stocks in the three weeks to January 21. "Financial markets have started to price in a very negative scenario with a re-rating of credit spreads and a deep correction of equity markets, down about 8 percent year to date," said Giordano Lombardo, chief executive and group chief investment officer at Pioneer Investments. He suggested keeping hedging in place to help mitigate the impact of extreme volatility, while building exposure to asset classes that have been oversold, such as selected emerging markets, European stocks or oversold US credit.
The poll revealed some signs of European managers beginning to nibble at hard-hit segments, with a one percentage point increase in Asia ex-Japan equities to 5.9 percent, the highest allocation since June 2015. Within their global balanced portfolios managers also raised their exposure to alternatives, which include hedge funds, private equity and infrastructure, to 9.1 percent, the highest ever, in a search for less correlated returns.