By Tushar Goenka
BENGALURU (Reuters) – Global funds flagged higher inflation as the top risk to their portfolios over the coming three months, cutting recommended bond holdings to the lowest in nearly three years and raising exposure to equities, a Reuters poll found.
Those views are supported by existing emergency monetary stimulus that big central banks like the Federal Reserve and the European Central Bank have yet to start unwinding.
The Oct. 15-28 Reuters poll of 35 fund managers and chief investment officers in the United States, Europe and Japan increased their recommended equity allocations to an average of 50.3% of their model global portfolio, the highest since late 2017, from 49.8% in September.
U.S. stock indices marched to record highs on Thursday, unfazed by a slower than expected pace of economic growth last quarter.
Most policymakers say the surge in inflation will not persist and supply chain disruptions and energy price rises driving it will subside. But some asset managers, like many traders, are concerned that might not be the case.
“Markets are moving in quicksand and the permanent inflation narrative is getting a boost,” said Matteo Germano, global head of multi-asset at Amundi. “Equities is the place to remain given the low yields from bonds, but in an already-stretched valuation environment, any rise in inflation from current high levels should result in a reassessment.”
Asked about the primary risk to their portfolio allocations over the next three months, respondents were almost evenly split between higher inflation, lower economic growth, earlier than expected central bank moves and the potential spread of new coronavirus variants.
That range of risks broadly echoes economists, who in a separate Reuters poll https://www.reuters.com/business/central-bank-moves-supply-shocks-among-top-risks-global-economy-2021-10-28 mostly agreed with central banks calling the current inflation surge transitory but increased their inflation forecasts and hardly moved their growth estimates.
“Overall, the backdrop for investors is becoming more uncertain and riskier, with little upside potential in the short-term,” said Amundi’s Germano.
Still, money managers in the latest poll cut suggested fixed-income holdings to an average 39.0% of the balanced global portfolio, the lowest since late 2018. It was 39.7% last month.
Asked on the most likely change to their portfolios over the coming three months, nearly two-thirds of 22 respondents said they would roughly maintain current positioning. The rest were split between increasing or reducing exposure to riskier assets.
“We are not increasing equities because we already came into the year with a significant overweight,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.
“With growth scare in the rear view mirror, and as we move into next year, we expect a moderation of gains given the run this year. We are positive but realistic – there may be some volatility out of Washington with many issues still unresolved.”
(Reporting and Polling by Tushar Goenka in BENGALURU and Fumika Inoue in TOKYO; Editing by Ross Finley and Emelia Sithole-Matarise)
