By Tushar Goenka
BENGALURU (Reuters) – Global fund managers slightly reduced their recommended exposure to risky assets in favour of bond holdings as they brace for more volatility in financial markets caused by sticky inflation and aggressive central banks, a Reuters poll found.
Recommended equity allocations were trimmed to an average of 50.1% of a model global portfolio from 50.3% in the previous month, according to a survey of 35 international funds in January.
Recommended bond holdings were raised by a similar amount to 39.3% of a balanced global portfolio, with allocations to cash, property and alternatives steady at 3.6%, 1.3% and 5.7%, respectively.
Fears of central banks turning more hawkish and rising geopolitical tensions dragged MSCI’s equities world index to the brink of its worst January since 2008 but better U.S. corporate earnings helped recoup some losses.
Those earnings reports meant the Nasdaq ended January strongly after narrowly avoiding its worst ever start to the year, but the S&P 500 still recorded its weakest January since the global financial crisis.
Meanwhile, the U.S. Federal Reserve is gearing up to raise interest rates in March. Other central banks have already started tightening or are set to follow the Fed after years of pandemic-related emergency stimulus.
“This is not a time to add risk, but to stick to the core convictions. Equity volatility is on the rise and will stay higher as markets reassess the inflation path and central banks’ response …. Single-digit equity returns in 2022 is our base case,” said Matteo Germano, head of multi-asset at Amundi.
The correction in asset prices last month came as inflation soared nearly everywhere.
“Higher inflation and higher rates will take a bite out of equity earnings. After decades on the back burner, the great inflation comeback will mean investors need to shift their mindset to real from nominal returns,” Germano added.
“Playing ongoing market gyrations will be paramount for generating returns.”
Fund managers now see the top risks to their portfolio positions as sticky inflation and how aggressively the Fed hikes interest rates.
That is a move away from coronavirus and its variants, a risk they flagged consistently through most of the pandemic.
(Reporting and Polling by Tushar Goenka in BENGALURU and Fumika Inoue in TOKYO; Editing by Mark Potter)
