Global funds became more cautious in May, shunning equities, recommending increasing cash holdings to their highest in three months and raising bond allocations to a level not seen in nearly two years, a Reuters poll showed.
That underscores worries over conflicting comments on U.S.-China trade talks and U.S. President Donald Trump’s threat to impose new tariffs on Mexico that risk tipping the global economy into recession.
“We believed the U.S. and China would resolve their differences over trade in a reasonable amount of time. But that confidence has been shaken. Policy-makers are running with scissors and that may lead to self-inflicted wounds,” said Alan Gayle, president at Via Nova Investment Management.
The trade battle has rattled financial markets this month, with the S&P 500 down over 5 per cent, after it rose more than 17 per cent through the first four months of the year, and Treasury yields slipping to multimonth lows.
The yield curve between three-month bills and 10-year notes has not only inverted, but the inversion is now the widest in nearly 12 years, as the Great Recession approached, a clear sign recession risks are rising again.
A majority of fund managers and chief investment officers polled by Reuters said the most likely change to their portfolios was a reduction in riskier assets or, at best, that they would roughly maintain current risk positioning over the next six months.
The average recommended exposure for stocks in May was the lowest since February, down to 46.7 per cent from 47.0 per cent the previous month, according to the latest poll of 41 funds in the United States, Europe, Britain and Japan conducted May 13-30.
“The breakdown in U.S.-China trade negotiations in May has become worrisome in that the disagreements appear to have evolved into a defence of national policy and values, particularly for the Chinese. This suggests that an agreement may take longer than expected, and we reduced equity exposure accordingly,” Via Nova’s Mr. Gayle said.
A recommended cash increase to 6.0 per cent was the highest since February, up from 5.2 per cent in the previous month. Suggested bond allocations for a model global portfolio were also increased, to the highest since August, 2017, to 40.8 per cent from 40.5 per cent.
The more defensive approach of long-term investors does not align with the approach of more than 200 equity strategists in a separate Reuters poll, who expected global stocks to keep rising. But they did say an escalation of the U.S.-China trade war poses the biggest hurdle.
However, some fund managers in the latest poll did argue that expectations for solid U.S. economic performance this year and expensive government bonds will keep their preference for equities intact.
“We started positioning more defensively, but we still prefer equities over bonds. Over the next six months, I anticipate we will get more constructive again on cyclical stocks and equities in general,” said Benjamin Suess, director at UBS Asset Management.
A breakdown of regional allocations showed recommendations for North American assets – both stocks and bonds – rose to the highest since at least the beginning of 2013, at the expense of euro zone holdings, according to a smaller sub-set of fund managers in the poll.
“We believe the U.S. has the best growth prospects within an increasingly challenged global economy. If policy-makers can avoid self-inflicted wounds such as trade wars, the equity markets can continue to move higher,” Mr. Gayle said.