Global funds raise equity allocations to 11-month high

Global funds recommended increasing equity allocations to the highest in a year, saying stock prices were likely to rise or stay around current levels in the next three months, while they lowered suggested bond holdings, Reuters polls showed.

Those recommendations came as the S&P 500 index slumped into negative territory for the year on Wednesday as US stocks suffered their biggest one-day percentage drop in three months.

Fund managers and chief investment officers in the US, Europe, Britain and Japan in the Jan. 12-29 Reuters asset allocation poll recommended raising equity holdings over 2 percentage points from December to average 49.0% - the highest since February 2020.

That marks the third consecutive increase in proposed equity allocations since October when that average had dropped to over a decade-low level.

When asked about the likely path for stock prices over the next three months, nearly 90% of 26 respondents said they would either rise or remain around current levels.

"We see some upside for the year. Markets are now pricing in the best possible world: earnings re-acceleration and economic rebound," said Pascal Blanqué, group chief investment officer at Amundi.

"But for the coming quarters we see some challenges — vaccination delays, severe lockdowns hitting the economy — that could prevent an upside. A deceleration is possible, given valuations are already expensive, so, it is a situation that deserves some caution."

US Treasury yields have fallen as investors turned cautious on worries about the strength of the economic recovery and the Federal Reserve left its policy unchanged.

Underpinning those concerns, there is a high risk a resurgence in Covid-19 infections could derail the world economy, a separate Reuters poll of around 500 economists showed. 

Upward Pressure on Bond Yields?

But the latest allocations poll suggested bond holdings - a key gauge of caution - be reduced to account for 40.1% of the model global portfolio, down from December's 41.6%, the lowest since March 2019.

That average has plunged over 5 percentage points since October, underscoring investors' increasing risk appetite.

Nearly two thirds of 26 respondents who responded to another question said major sovereign bond yields would remain around current levels over the next three months while nine said they would rise. None expected them to fall.

"The direction for bond yields over the next three months is a difficult call," said Peter Lowman, chief investment officer at Investment Quorum. "If the pandemic were to heighten and the vaccine programmes stall then investors could increase their weighting to safe-haven assets.

"Equally, if equities continue to rally on further euphoria from additional vaccines then they could rise fairly rapidly as investors embrace further risk in their portfolios. We might see movements either way but overall they stay at their current levels."

Most fund managers cited the vaccines' efficacy and excessive optimism as the top risks to their recommendations and said further policy support and dips in stock prices would be opportune moments to increase exposure to risky assets.

"We should think about 2021 as divided into two phases. First, would be the expectations of a V-shaped recovery and other underlying conditions that might be more favourable to risky assets in the short run," noted the investment team at Generali Investments Partners.

"Later in the medium-long run, when the world normalization is seen closer and more tangible, the more important risk to financial markets comes from rates moving higher quicker and more than expected, features that are less market friendly."