Reuters Asset Allocation Polls

The Reuters Global Asset Allocation poll is a monthly survey of recommended global portfolio allocations from many of the world's top investment firms, based in the U.S., UK, Continental Europe, and Japan. The poll was conducted Jan 15-29.

Global funds cut U.S. equity holdings, raise cash U.S. fund managers hold portfolios steady in volatile January British investors cut equities, dash for cash European funds raise euro zone bond, equity holdings China funds increase equity allocations as confidence slowly mends Japan fund managers slightly increase stocks allocations in January

REUTERS GLOBAL ASSET ALLOCATION POLL

Global funds cut U.S. equity holdings, raise cash lobal investors cut their U.S. equity holdings and raised their cash levels in January, a Reuters poll of fund managers showed on Friday, as the S&P 500 suffered its worst January since 2009 and global stocks shed over $8 trillion.

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"China is likely to continue to provide investors with intermittent cause for concern," said Boris Willems, a strategist at UBS Global Asset Management. "Differentiating between developments in China's real economy and its often erratically moving domestic stock market - and assessing their potential impact on global asset prices -will remain key, however." Raphael Gallardo, an asset allocation strategist at Natixis, said a hard landing in China remained a risk, as this could force a big devaluation of the yuan, sending deflationary shockwaves across the globe. Other concerns focused on central banks, with the U.S. Federal Reserve on a tightening path. This is expected to reduce liquidity and add to dollar strength. "Such an environment could lead to bouts of heightened market volatility, particularly if investments are crowded in a few popular trades, as was frequently the case in 2015," said Willems. While the European Central Bank (ECB) and Bank of Japan (BOJ) remain in easing mode, some asset managers thought they were losing effectiveness in the face of very weak inflation. "They may fail to effectively curb market volatility in the medium term, as they did after the Great Financial Crisis," said Giordano Lombardo, chief executive and group chief investment officer at Pioneer Investments. "Financial markets have started to price in a very negative scenario." However, given the extent of the selling, some managers said pockets of value were appearing in

the more bombed out segments. "Now that the world's equity markets are officially in 'bear market territory' the opportunity for investors to buy quality stocks at much cheaper levels has arrived," Lowman said. Within their global equity portfolios, investors raised their UK equity allocation to 12.1 percent, the highest since December 2014, and their euro zone allocation to 18.8 percent. They raised their allocation to Asia ex-Japan stocks to 6.2 percent, suggesting that some emerging markets were beginning to look attractive due to their extremely depressed valuations. "If China does not derail in its transition process (and) developed markets remain resilient and avoid deflationary spirals, we believe the market over-reaction can open up value opportunities for long-term investors," said Lombardo. Within global fixed income portfolios, investors raised their euro zone bond holdings to 28.7 percent, the highest level since August 2015, and their Japanese bond holdings to 15.1 percent, betting on further easing from the ECB and BOJ. But the U.S. bonds allocation was cut by 2.4 percentage points to 35.8 percent, the lowest since June 2014. Within their global balanced portfolios, managers also raised their exposure to alternatives, which include hedge funds, private equity and infrastructure, to 7.1 percent, the highest ever, in a search for less correlated returns.

U.S. stocks shrank 1 percentage point to 37 percent of asset managers' global equity portfolios, with U.S. equities down more than 7 percent this year. A collapse in oil prices to 12-year lows, heightened Chinese market volatility and worries about structurally low growth and high global debt sent investors stampeding for cover in January, pushing stocks deeper into bear market territory. "Clearly, global equity markets have been driven by panic and anxiety so far this year," said Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum. The survey of 46 fund managers and chief investment officers in the United States, Europe, Britain and Japan was conducted between Jan. 15 and 27. During this period, wild swings in stock markets and a blow-out in credit spreads encouraged investors to raise their cash levels to 6.5 percent of their global balanced portfolios, the highest since June. Overall equity holdings fell only slightly to 47.6 percent, but this was the lowest level since September. Many investors expressed concern about the murky outlook for China. Policymakers there have unnerved markets due to perceived poor communication, and the implementation of measures intended to curb market volatility that had the opposite effect.

Global equity allocation

Global bond allocation

REUTERS ASSET ALLOCATION POLL

U.S. fund managers hold portfolios steady in volatile January U.S. fund managers made few tweaks to their model global portfolio in January, despite high levels of market volatility across asset classes triggered by concerns about a slowing global economy, a Reuters poll showed. Global equity allocations accounted for 52.5 percent of this month's portfolio, based on a survey of 11 U.S.-based global funds, a touch higher than 52.1 percent in December. Bonds were also barely changed at 37.3 percent compared with 37.4 percent. Those recommendations have been steady over the past few months. But they have changed dramatically since early 2010 when, less than a year into a stock market rally, they stood above 66 percent for equities and below 30 percent for bonds. A punishing stock market sell-off since the start of this year - the first real major correction to that rally and which has taken the Standard & Poor's 500 index down over 7 percent - has fuelled doubts about further hikes in U.S. interest rates after the Federal Reserve raised them from nearzero last month. But portfolio managers appear to be holding their nerve. "The list of worries we had going into 2015 continues in 2016 and I think investors are growing impatient with the lack of progress," said Alan Gayle, senior investment strategist at RidgeWorth Investments. "I would say we're very cautious about the markets over the next one to two months. (But) I'm actually very positive about 2016. I think a number

Traders work on the floor of the New York Stock Exchange in New York, January 28, 2016. REUTERS/Brendan McDermid

of factors can fall into place that could help equities rebound." Within equity allocations, fund managers cut recommended North American stock holdings slightly to 67.6 percent from 67.9 percent.

British investors cut equities, dash for cash British investors reduced their equity holdings and sought safety in cash in January, a Reuters poll showed on Friday, after nearly $8 trillion was wiped off global stock markets at the start of the year. Asset managers cut their overall equity holdings by 3.5 percentage points to 49.7 percent, the lowest since September 2015, and raised their cash from 5.5 percent to 10.1 percent, the highest level since June. The poll was conducted between Jan. 15-27, a period in which stock markets were in freefall, notching up one of their worst Januarys on record. This prompted some investors to run for cover and sit out the volatility on the sidelines. Peter Lowman, chief investment officer at Investment Quoram, said equity markets had been driven by panic and anxiety as worries over the collapse in the oil price, the perceived Chinese economic slowdown, and fears of a further slump in global growth took their toll. Whilst these issues aren't expected to go away in the near term, with equities now officially in bear market territory Lowman thought the time was right for investors to buy quality stocks at much cheaper levels. "We see many opportunities ... as pockets of deep value appear around the world - this is definitely a

stock-picker's market," he said. Within their global equity portfolios, British managers showed a strong preference for their home market, raising their UK allocation by six percentage points to 32.9 percent, the biggest weighting ever. They cut their U.S. equity holdings by two percentage points to 26.2 percent, with some saying the U.S. bull run was over. The S&P 500 has been on a rising trend since 2009 but ended 2015 flat and is down almost 8 percent in 2016. "The best opportunity is in large cap, value stocks - but timing this decision is a devil of a job. Catching falling knives is a dangerous game," said Rob Pemberton, investment director at HFM Columbus. Emerging markets continued to divide managers, with some like Pemberton remaining wary. But Thomas Becket, chief investment officer at Psigma Investment Management said certain markets now looked very appealing due to extremely depressed valuations. Within their fixed income portfolios, managers cut their U.S. and UK bond holdings by between six and eight percentage points and added to eurozone and Japanese bond holdings, with both the European Central Bank and the Bank of Japan still in easing mode.

With global allocations to bonds, fund managers favored increased exposure to investment grade debt and less to junk bonds. They slightly boosted allocations to cash.

REUTERS ASSET ALLOCATION POLL

Traders work during Monday's afternoon session at the Istanbul Stock Exchange October 3, 2005. REUTERS/Fatih Sariba

European funds raise euro zone bond, equity holdings European funds raised their exposure to euro zone bonds and equities in January after the ECB hinted strongly that further easing could be on the way and European stocks plunged more than 20 percent, a Reuters poll showed on Friday. The poll of 18 European asset managers was conducted between Jan. 15-27, coinciding with the European Central Bank meeting at which President Mario Draghi said the bank would need to be ready to use any instrument to combat the deteriorating economic outlook. Investors interpreted this to mean that further stimulus measures were likely, such as a cut in the deposit rate or an increase in the bank's monthly asset purchases. Within their global fixed income portfolios, asset managers increased their euro zone bond holdings by more than 5 percentage points in January to 55.8 percent, the highest level since October 2015. They also boosted exposure to euro zone stocks slightly to 35 percent of their global equity portfolios. "Risk assets should remain supported by the ECB's accommodative monetary policy, euro and oil price weakness, as well as the potential for corporate earnings growth to gather momentum," said Boris Willems, a strategist at UBS Global Asset Management. Asset managers cut exposure to U.S. bonds by around 4 percentage points to 20.8 percent, the lowest level since June 2015. This followed the U.S. Federal Reserve's decision to raise interest rates in December, its first hike in nine years.

Willems said U.S. tightening increased the likelihood of a more liquidity-constrained investment environment in the year ahead. This could lead to bouts of heightened market volatility, particularly if investments were crowded in a few popular trades, as was often the case in 2015. Nearly $8 trillion was wiped off global stocks in the three weeks to Jan. 21. "Financial markets have started to price in a very negative scenario with a re-rating of credit spreads and a deep correction of equity markets, down about 8 percent year to date," said Giordano Lombardo, chief executive and group chief investment officer at Pioneer Investments. He suggested keeping hedging in place to help mitigate the impact of extreme volatility, while building exposure to asset classes that have been oversold, such as selected emerging markets, European stocks or oversold U.S. credit. The poll revealed some signs of European managers beginning to nibble at hard-hit segments, with a one percentage point increase in Asia ex-Japan equities to 5.9 percent, the highest allocation since June 2015. Within their global balanced portfolios managers also raised their exposure to alternatives, which include hedge funds, private equity and infrastructure, to 9.1 percent, the highest ever, in a search for less correlated returns.

REUTERS ASSET ALLOCATION POLL

Japan fund managers slightly increase stocks allocations in January Overall stock holdings in model portfolios of Japanese fund managers increased slightly in January as they enlarged their holdings of domestic equities amid the turbulence in global markets, a Reuters survey found on Friday. A survey of six Japan-based fund managers, conducted between Jan. 18 and 22, showed respondents on average wanted to allocate 42.3 percent of their portfolios to stocks, up from 41 percent in December. Within stocks, the respondents raised their allocation of Japanese equities to 58.8 percent in January from 57.1 percent in December. They also increased euro zone equity exposure to 10 percent from 8.3 percent. On the other hand, the respondents reduced their allocations to emerging stock markets that have been hit hard by sliding commodity prices and fears of a China-led global slowdown. The fund managers cut their allocation to Latin American stocks to zero in January from 1.7 percent in December and decreased their exposure to emerging European equities to 2.2 percent from 3.8 percent.

MSCI's emerging markets index has lost about 10 percent so far in January, dropping to a 6-1/2-year low. Japan's Nikkei was also headed for a 10 percent loss in January but its downturn was less severe. The index slipped to a 14-month trough earlier this month but has rebounded significantly since. The respondents trimmed their global bond allocation to 52.4 percent in January from 53.3 percent in December. The fund managers kept their exposure to North American and Japanese bonds unchanged in January at 28.1 percent and 45.7 percent, respectively. But they nudged up allocations to UK debt to 3.8 percent in January from 2.8 percent in December. Foreign investor demand for British gilts have increased recently on perception they are safer than other European government debt. Furthermore, gilts offer higher yields than their regional counterparts, such as Spanish and Italian bonds. Five-year gilt prices touched an 11-month high in January on the back of steady demand.

China funds increase equity allocations as confidence slowly mends Chinese fund managers kept their suggested equity exposure for the next three months unchanged at 75 percent, in anticipation the market will rebound following January's more than 20 percent slump, a Reuters poll showed. Recommended bond and cash holdings were also unchanged, both at 12.5 percent, according to the poll conducted this week. "January's market decline exceeded our expectations," said a fund manager in southern China, who declined to be identified. "However, after such a big correction, there's relatively small room for further falls, while the chance of a rebound is increasing." Still, fund managers surveyed in the monthly poll say future interest rate rises by the U.S. Federal Reserve and possible yuan depreciation pose the biggest risks to stock investors. Fund managers slightly increased their suggested allocations to the financial and auto sectors, which are modestly valued, while slashing recommended exposure to tech shares. A man looks at the Pudong financial district of Shanghai November 20, 2013. REUTERS/Carlos Barria

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