Fund Managers Cut Equity Allocations Before Ukraine War

Asset managers cut equity allocations by late February to less than 50% in model global portfolios, in part because of inflation.

By Tushar Goenka

Global asset managers were already in a more defensive mood in February over rising inflation even before Russia invaded Ukraine, recommending an increase in cash holdings while trimming exposure to equities, a Reuters poll found on Monday.

Thirty-five fund managers and chief investment officers in the United States, Europe and Japan polled between Feb. 14 and Feb. 28 cut their recommended equity allocation to an average of 49.5% of a model global portfolio, down from 50.1% and the lowest since May 2021.

Most of the polling was done before the Feb. 24 invasion, which sent stock markets into a tailspin, bolstering safe-haven assets such as bonds, the U.S. dollar and gold. Russian markets have since buckled under sanctions.

Markets already had a volatile start to the year as inflation in major economies exceeded expectations, spurring speculation their central banks lift interest rates sooner and faster than earlier anticipated.

Asset managers increased their cash buffer to 4.2%, the highest since December 2020, from 3.6%.

Fixed-Income Holdings Notched Up

Money managers also notched up suggested fixed-income holdings to an average 39.5% of a balanced global portfolio from 39.3% last month.

When asked how much of an impact inflation would have earnings this year, 18 of 19 respondents said either very significant or significant. Just one said insignificant.

Most of those who saw inflation playing a role, also said interest rate hikes in response to rising prices would also hit company earnings.

“We’re often asked whether this bout of inflation is likely to prove transitory or persistent,” said Justin Onuekwusi, head of retail multi-asset funds at Legal & General Investment Management. “That feels a bit like being asked if we believe in God. We can give an answer, but would be more based on faith, or lack of it, than analysis,” he said.

“The uncomfortable truth is that no one has a particularly accurate model of how the inflation process works.”

Asked which sectors would outperform over the coming 12 months, most chose financials, healthcare and energy. A similar number saw technology underperforming.

“After years of underperformance, financials and energy are having a good start into the year and we expect this trend to continue,” said Salvatore Bruno, head of investments at Generali Investments Partners, citing rising prices and supply constraints because of lack of investment in fossil fuels.

This article was provided by Reuters.

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