funds recommend slight reduction in equity allocations: Reuters poll | Investment News

BENGALURU (Reuters) – Global fund managers have cut their recommended exposure to risky assets slightly in favor of bond holdings as they brace for greater volatility in financial markets caused by persistent inflation and aggressive central banks, according to a Reuters poll.

Recommended equity allocations have been reduced to an average of 50.1% of a model global portfolio, from 50.3% the previous month, according to a January survey of 35 international funds.

Recommended bond holdings were increased by a similar amount to 39.3% of a global balanced portfolio, with allocations to cash, real estate and alternatives stable at 3.6%, 1.3% and 5 .7%, respectively.

Fears of central banks becoming more hawkish and growing geopolitical tensions drove the MSCI World Equity Index to the brink of its worst January since 2008, but better US corporate earnings helped recoup some losses.

These earnings reports mean the Nasdaq ended January strong after narrowly avoiding its worst start to the year, but the S&P 500 still recorded its weakest January since the global financial crisis.

Meanwhile, the US Federal Reserve is preparing to raise interest rates in March. Other central banks have already started to tighten or are expected to follow the Fed after years of emergency pandemic-related stimulus.

“Now is not the time to add risk, but to stick to fundamental beliefs. Equity volatility is on the rise and will remain higher as markets reassess the path of inflation and the response of central banks… 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 almost everywhere.

“Higher inflation and higher rates will eat into equity earnings. After decades on the back burner, the big comeback of inflation will mean investors will have to shift their mindset between real and nominal yields,” Germano added.

“Playing the ongoing market swings will be key to generating returns.”

Fund managers now see the main risks to their portfolio positions as the persistence of inflation and the aggressiveness with which the Fed is raising interest rates.

It’s a move away from the coronavirus and its variants, a risk they’ve consistently flagged for most of the pandemic.

(Reporting and polling by Tushar Goenka in BENGALURU and Fumika Inoue in TOKYO; editing by Mark Potter)

Copyright 2022 Thomson Reuters.

James V. Hayes