Global investors review allocations to ease monetary tension

GLOBAL investors cut their holdings of cash in March to near two-year lows as they look to harness global financial markets kept buoyant by monetary stimulus around the world, a Reuters poll found.

A monthly survey of fund managers and chief investment officers in the United States, Japan, Europe and Britain found the average recommended allocation to cash in global balanced portfolios was 5.3 percent, down from 5.8 percent in February.

Cash is typically used as a buffer by investors against market volatility and allocations fall when they expect risk assets such as stocks to perform well.

The average allocation to equities stood at 50.6 percent in March, close to a five-month peak of 50.7 percent reached in February, while bond exposure rose to 36.8 percent, up from 36.5 percent a month earlier.

Investors attributed much of their faith in assets such as stocks and bonds to the expected impact of central bank policies aimed at fighting off deflation and reviving moribund economies.

In particular, the European Central Bank embarked this month on a money-printing asset purchase scheme similar to those implemented in the United States and Britain after the 2008 financial crisis as a way to boost growth and inflation.

Such quantitative easing or QE is seen as good for equities because it cuts the cost of financing for companies and makes their exports cheaper by weakening the euro, and for bonds because by buying them up, central banks limit their supply.

“Our main equity overweight is on euro area equity … given the building macroeconomic momentum supported by the ECB quantitative easing,” said Raphael Gallardo, asset allocation strategist at Natixis Asset Management.

“We also keep an overweight on euro area bonds given that bond market valuations should continue to be inflated by ECB purchases.” The U.S. Federal Reserve is expected to start raising interest rates later this year, ending its era of ultra-easy monetary policy as the economy recovers, though the timing of such a move remains uncertain.

The possibility of a mistimed interest rate hike that stifles the still fragile economic recovery was highlighted as a key risk by investors, as well as a faster than expected slowdown in Chinese growth.

The poll was taken from March 16-30, when world stocks <.MIWD00000PUS> advanced by more than 1.5 percent, nearing the record highs touched in February. The U.S. S&P 500 <.SPX> index was unchanged over the period and is currently trading around 1.5 percent off an all-time high reached in February.

Emerging market stocks <.MSCIEF> gained more than 2 percent during the survey period. U.S. fund managers cut their recommended global equity allocation and suggested increasing fixed-income allocations to their highest this year.

British investors raised exposure to equities to a six-month high at 54.3 percent, largely at the expense of cash which they reduced to 7.5 percent from 8.4 per cent in February.

European investors increased their average allocation to equities in global balanced portfolios to a multi-year high of 49.2 percent from 48.6 percent a month earlier.

Exposure to cash dropped a percentage point to 6.1 percent while bond allocations were also lower at 36.7 percent from 36.8 percent in February.Japanese fund managers kept overall allocations of stocks and bonds largely unchanged at 44.1 percent in their model portfolios in March, but continued to buy more euro zone shares.