Global funds still recommend bonds over stocks
By Rahul Karunakar
BENGALURU (Reuters) – Global fund managers are convinced the world economy is already in recession, and recommended increasing bond holdings in March to the highest level in at least seven years while buffering up on cash at the expense of equities, a Reuters poll showed.
The damage the coronavirus pandemic and oil price collapse have inflicted on global financial markets has been the fastest selloff since the crash of 1929 that led to the Great Depression.
Some $15 trillion has been wiped off world stock markets <.MIWD00000PUS>, the oil price has slumped 60% since Saudi Arabia and Russia started a price war and currencies in major emerging economies including Brazil, Mexico and South Africa have plummeted more than 20%.
“For once in many years, the reality of the underlying economic conditions and financial markets’ moves seem to coincide despite policy first-aid, which previously had made the pain go away instantly,” said a global chief investment officer at a large fund management company.
“The recent fall in equities reflects the wrongdoings over the past decade such as share buy-backs at a time when investment growth was warranted. With the economic hit becoming more clear from the worldwide shutdown of activity, the market moves going forward could get more distressing.”
With the U.S. Federal Reserve slashing interest rates to near zero, pumping trillions of dollars into the market and announcing unlimited and open-ended bond purchases, ultra-safe U.S. Treasuries have returned 13% so far this year.
The monthly Reuters poll of 34 fund managers around the globe taken March 16-30 showed that in the model global portfolio, bond holdings – a key gauge of investor caution – rose to their highest since the poll series started in early 2013, to 43.1% from 41.4% last month.
All 19 managers who answered a separate question about the global economy said it was already in recession, similar to economists’ assessments in another Reuters poll.
“We are experiencing an extremely rapid economic contraction which very likely will have dragged Q1 GDP into negative territory but of course the majority of the hit to GDP will come in Q2,” said Benjamin Suess, director at UBS Asset Management.
Asked what was the most likely path for government bond yields over the next three months, nearly 95% of 19 respondents said they would fall further or stay around current levels – a similar result to a separate Reuters poll of fixed-income strategists.
“The monumental scale of stimulus announced by central banks can only bring bond yields lower. Even as investors liquidate easier-to-sell assets such as U.S. Treasuries despite the risk-off environment,” said Craig Hoyda, senior quantitative analyst at Aberdeen Standard Investments in Edinburgh.
“The sheer scale of the Fed’s buying power will keep yields capped.”
Asset managers reduced recommendations to equity exposure to the lowest since September, to 45.9% of the model global portfolio from 49.1%. Cash holdings were increased to the highest since October, to 5.2% from 3.8%.
Asked on the outlook for equities over the next three months, nearly 90% of respondents said stocks would fall further or stay around current levels.
“Trying to call the bottom of the market and carefully buying is like picking up pennies in front of a steamroller,” said Peter Lowman, chief investment officer at Investment Quorum in London.
“The likelihood is that we might become rangebound over the coming three months, but that won’t stop markets giving investors a rollercoaster ride.”
Governments and central banks have unleashed unprecedented fiscal and monetary stimulus, with the G20 pledging to inject more than $5 trillion to tackle the coronavirus pandemic.
The carnage in financial markets has delivered a 25% slump in the MSCI 49-country world index <.MIWD00000PUS>, 27% for London’s internationally-exposed FTSE <.FTSE> and over 20% for Wall Street’s Dow Jones <.DJI> and S&P 500 <.SPX>.
The fact the S&P and Dow were at record highs back in mid-February has made the crash more brutal.
That was reflected in survey responses, which showed U.S. funds suggested a cut to equity exposure to the lowest in Reuters poll records for that country going back to early 2011 and an increase to bond holdings to the highest since then.
“With volatility at Lehman crisis levels it is extremely hard to call the near-term direction in equity markets. An initial strong bear market rally – driven by short covering – could peter out into a retest of market lows,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.
(Additional reporting and polling by Sarmista Sen in BENGALURU and Fumika Inoue in TOKYO; Editing by Ross Finley and John Stonestreet)