Global funds cut equity holdings as growth fears mount: poll

By Claire Milhench

LONDON (Reuters) - Global investors have slashed equity holdings to their lowest in at least five years and raised bond allocations to nine-month highs, responding to turbulent stock markets and the potential fallout from China's slowdown.

The September Reuters survey of 44 fund managers and chief investment officers in the United States, Europe, Britain, Japan and China was conducted after the U.S. Federal Reserve held off raising interest rates, citing concerns about global growth, China and market volatility.

But Fed Chair Janet Yellen has signaled that a rate rise is likely before the end of the year, despite lingering concern over U.S. employment and stubbornly low inflation.

At the same time, lackluster data out of China has heightened fears that the world's second-largest economy is heading for a hard landing, worsening the outlook for commodity markets and dragging down world growth.

"The greatest risk remains an economic slowdown," said Nadege Dufosse, head of asset allocation at Candriam, a European asset manager. "Central banks are already very dovish, and a loss of confidence in their actions and efficiency could bring markets to a lower level."

The uncertainty and mixed messages from Fed officials over the last week has helped push global equity markets to a two-year low.

Emerging market equities are down almost 20 percent in the year to date - even a modest U.S. rate increase could hurt foreign currencies and suck more capital from emerging markets.

Against this backdrop, the proportion of equities in global balanced portfolios was reduced to just 46.9 percent, the lowest in at least five years. The cash allocation was raised to 6.4 percent, from 6 percent in August.

"The causes behind the recent market turbulence are not going to fade in the short term," said Matteo Germano, global head of multi-asset investments at Pioneer, adding that he was maintaining a cautious stance.

Within the equity portion, managers cut their exposure to U.S. and Canadian stocks to 37.1 percent from 41.7 percent in August. But they raised the weighting for UK, euro zone, emerging Europe and Japan equities.

Boris Willems, a strategist at UBS Global Asset Management, said the firm retained its preference for developed equity markets outside of the United States.

"Amid subdued inflationary pressures, both the European Central Bank and the Bank of Japan are likely to remain in monetary-easing mode, providing further support to risk assets against a backdrop of positive corporate earnings growth momentum," he said.

BEARISH EM

Sentiment towards emerging markets remained bearish, with few managers saying these were priced attractively enough to consider re-entry.

Some of the biggest emerging markets, such as Brazil and Turkey, are beset by political issues. Currencies are at multi-year or record lows against the dollar. Many are seeing their credit ratings downgraded.

The collapse in commodity prices is increasingly raising fears over debt repayments, particularly for African nations.

"There are better opportunities in markets where economic growth has greater momentum, such as the U.S. and Europe, and in companies or sectors which are more domestically focused and less exposed to slowing Chinese growth," said Mark Robinson, chief investment officer of Bordier (UK).

The proportion of bonds in global balanced portfolios rose to 37.7 percent, just below December 2014 levels, which were the highest in 18 months. Within fixed income, allocations to U.S. and Canadian bonds rose just under 3 percentage points to 40 percent.

Peter Lowman, chief investment officer at Investment Quorum, a UK-based wealth manager, said the biggest risk to markets stemmed from action the Fed might take before the end of the year.

"Any errors of judgment in U.S. central bank policy at this delicate stage could be devastating for global economic growth especially when there are some skeptics already predicting a U.S. recession for next year."

(Additional reporting by Sarmista Sen in Bangalore, editing by Larry King)

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