By Rahul Karunakar and Hari Kishan
BENGALURU (Reuters) – Funds increased their preference for stocks to a two-year high at the expense of bonds and cash holdings in their model global portfolio recommendations this month in a Reuters poll, despite world share markets struggling on the coronavirus breakout.
That cautious mood in markets lines up with responses to a separate question, which showed international long-term investors would either roughly maintain their current risk positioning or reduce their exposure to riskier assets and positions within the same asset class.
“We should consider that we are in a late (economic) cycle, and most of the cyclical acceleration in 2020 is expected in the first half. Therefore, we expect to reduce risk exposure at some point between Q2 and Q3,” said Pascal Blanqué, chief investment officer at Europe’s largest asset manager, Amundi, in Paris.
The latest Reuters poll was conducted amid mounting worries about the economic damage from a coronavirus outbreak in China that so far has led to more than 200 deaths, multiple travel bans, flight cancellations and factory shutdowns.
“While we acknowledge the increased risks represented by the coronavirus and rising Middle East tensions, the global economic landscape is notably more positive entering 2020,” said Alan Gayle, president at Via Nova Investment Management.
“Moreover, earnings prospects are improving and central bankers intend to keep interest rates low, which supports a higher stock market. We plan to maintain our increased equity exposure at least over the near term.”
The Jan. 17-31 poll of 37 asset managers showed global investors in search of better returns increased their exposure to equities to the highest since January 2018, to an average 49.7% from 47.0% in December.
“Equities look most attractive from a cross-asset point of view and remain one of the highest-yielding assets,” said Benjamin Seuss, director at UBS Asset Management.
Funds suggested a cut to bonds holdings to 40.3% from 42.1% and cash levels to the lowest in two years to 4.3% from 4.6% in December.
“It is likely that global equities will outperform bonds in 2020 as investors remain committed to risk assets for their total return strategies,” said Peter Lowman, chief investment officer at Investment Quorum in London.
“Nonetheless, its a question of ‘what you own rather than just owning the market’ given valuation distortions in parts of the equity market.”
But many fund managers viewed the potential economic damage from the coronavirus and below-expectations earnings growth as the biggest risks to their current positioning.
“The hit to Chinese consumption from the coronavirus outbreak could delay or weaken the re-acceleration of global growth,” said UBS’s Seuss in Zurich.
“The market is priced for a sharp rebound in earnings over the next few months and any delay could cause some additional but modest volatility. Any pullback of around 5% or so will be a buying opportunity for equities,” he added.
While equities in both developed and emerging markets were predicted to rise modestly this year, the conviction among fund managers was much stronger for developed markets equities, which had a banner year in 2019.
More than 80% of portfolio managers in response to an additional question said stocks in advanced economies would rise modestly.
But on emerging-market equities – which rallied late last month and earlier in January – they were more split, with around 60% predicting a rise and the remaining 40% expecting a decline in 2020.
The regional breakdown showed developed-market stocks broadly rose at the expense of the emerging markets.
“We need to see earnings growth come through in 2020 to support equity markets following the large re-rating in 2019. Liquidity provided by the Federal Reserve has also calmed markets,” said Craig Hoyda, senior quantitative analyst at Aberdeen Standard Investments in Edinburgh.
“However, any withdrawal could reverberate through to emerging markets.”
(Additional reporting and polling by Tushar Goenka and Indradip Ghosh in Bengaluru and Fumika Inoue in Tokyo; editing by Ross Finley, Larry King)