Investors have sought signals as to when the ECB will start reducing its asset-purchase scheme, but the bank left its ultra-easy monetary policy unchanged at its July meeting and did not even discuss winding down stimulus.
That probably gave fresh impetus to investor bullishness on Europe.
Reuters’ monthly asset allocation survey of 49 fund managers and chief investment officers in Europe, the United States, Britain and Japan, showed assets from the single currency bloc continued to be favoured.
The poll, conducted between July 17-26, showed funds boosting eurozone equity allocations to an average 20.1%, the highest level since April 2015 and up 3.4 percentage points since the start of the year.
They also raised eurozone bond holdings by two percentage points to 29.2%, the highest since March 2015.
European equities are up 5% year-to-date though they are set to end July flat, possibly spooked by the euro’s surge to near two-year highs.
Over two-thirds of poll respondents who answered a question on monetary policy said they did not expect all four major central banks — the ECB, Bank of Japan (BoJ), the US Federal Reserve and the Bank of England — to be in policy-tightening mode by end-2018.
The ECB and the BoJ were most often named as the central banks likely to lag the other two.
Alain Zeitouni, senior portfolio manager at Russell Investments, was amongst those who cited the ECB.
“We expect a slow and gradual tapering in the course of 2018 in order not to scare global capital markets,” he said.”Inflation remains sub-2% in the euro area and with potential uncertainties around Italian elections in 2018, it is very unlikely the ECB will act before the end of the year.”
Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), said their highest conviction view was that the BoJ would not raise rates. “The recent downgrade in their inflation outlook confirms our view that the underlying inflationary pressures remain low.
We expect yen weakness to boost Japanese equities,” he said.
Investors increased Japanese equity exposure to 17.7% in July, the highest since November 2016, whilst raising Japanese bonds by over 1 percentage point to 13.5%.
The BOJ kept policy unchanged in July and pushed back the timing for achieving its inflation target.
Some managers also doubt the Bank of England will be able to tighten any time soon, with Justin Onuekwusi, a fund manager at Legal & General Investment Management, citing fragile consumer demand and uncertainty over Britain’s upcoming exit from the EU. “The MPC will have to balance a slowing economy and rising inflation — a mild form of stagflation,” he said.
In contrast, the US Federal Reserve is expected to tighten further and to start reducing its bond holdings soon, a step it alluded to at its July meeting.
Investors cut their US equity holdings to 39.3% in July, the lowest level since Donald Trump’s election as US President in November.
Although US stock markets have rallied to record highs, some investors expressed concern about stretched asset prices. With Trump’s promised tax cuts and higher spending already priced in, the market is viewed as vulnerable to disappointment. Some 85% of poll participants who answered a question on Trump predicted he would see out his four-year term, notwithstanding an ongoing investigation into possible collusion between his presidential campaign and Russia.
Several asset managers saw impeachment as difficult unless the Democrats made substantial gains at 2018 mid-term elections.
Robeco strategist Peter van der Welle, however, put Trump’s odds of survival at 50/50.
“If (special counsel Robert) Mueller manages to keep the investigation on track and presents compelling evidence, it is not unthinkable he has cleared enough smoke for Congress to trigger impeachment,” he said. Overall, investors trimmed equity holdings to 46.1% of global portfolios, the lowest since March, while raising bond allocations to 40.8%, the highest since December.
In another sign of caution they raised cash levels by almost one percentage point to 5.3%. Just over half of those who answered a question on rock-bottom implied volatility expected it to spike higher, citing potential earnings disappointments as a possible trigger.
“At current valuations, markets are priced for a return of Goldilocks — in the second phase of the cycle this is an assumption you should be concerned about,” said Francois Savary, chief investment officer at Prime Partners.