By Claire Milhench
LONDON (Reuters) – Global investors raised their bond exposure and held cash at high levels in November, citing uncertainty around U.S. President-elect Donald Trump’s plans and worries about political risk in Europe, a Reuters monthly poll showed on Wednesday.
Although Trump’s promises to cut taxes and boost spending have pushed up bond yields on the expectation of higher inflation, some poll participants wanted to see if he would actually implement these expansionary policies before making big changes to their portfolios.
Global bond markets have sold off in the wake of Trump’s election, wiping out more than $1 trillion in a two day rout. U.S. two-year Treasury note yields <US2YT=RR> have risen to 6-1/2 year highs and U.S. 10-year Treasury yields <US10YT=RR> are set to end November with their biggest monthly rise since December 2009.
But the poll of 45 fund managers and chief investment officers in Europe, the United States, Britain and Japan showed bond holdings rising to 40.7 percent of global balanced portfolios, up from 39.9 percent in October. The survey was carried out between Nov. 18 and 28.
Some poll participants, such as Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, said they retained a significant exposure to government bonds in spite of record low yields and high valuations.
This was mainly to diversify away from equity risk, but Choukeir noted that government bonds had delivered excellent returns over the last one, three and five-year periods through conditions similar to today – a surprise to many. “It is more than possible that they will continue to surprise,” he said.
Although 65 percent of respondents who answered a question on the global bond market thought the multi-decade long bull run was over, several argued that with the European Central Bank, Bank of Japan and Bank of England still buying bonds, rates would remain “lower for longer”.
REFLATION VS DEFLATION
Others, such as Matteo Germano, global head of multi-asset investments at Pioneer Investments, favored inflation-linked bonds in the United States, euro zone and Japan.
“Reflation trends make a flexible and unconstrained approach to fixed income paramount,” he said, adding that there were still areas of value in high yield and investment grade bonds. “We still don’t see a massive rotation out of fixed income.”
Indeed, some managers were skeptical about whether Trump would actually deliver on his promises and whether this merited an immediate switch out of deflation trades such as bonds and into inflation plays such as U.S. small cap stocks.
“Trump could have been the catalyst to spur higher inflation, higher real rates. But as yet it is too early to say,” said Sacha Chorley, a portfolio manager at Old Mutual Global Investors. “We will have more clarity when his policies actually get revealed in January.”
Others, such as Peter Lowman, chief investment officer at UK-based wealth manager Investment Quorum, expressed concerns about upcoming elections in Germany, France, the Netherlands and Austria, given that populism is on the rise.
With the Italian referendum on constitutional change due on Dec. 4, he warned that “further shock results” were possible after Brexit and Trump. But he added there was still a “sizeable amount of money on the sidelines” waiting to come in if markets got oversold.
In the poll, cash levels were steady at 6.6 percent of global balanced portfolios, suggesting investors were keeping their powder dry, whilst equity holdings were steady at 44.1 percent.
Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), said he had reduced his equity overweight ahead of the U.S. presidential elections but had bought again in the immediate aftermath when uncertainty triggered a sell off.
Greetham thought Trump’s reflationary policies could accelerate a pick up in global growth, benefiting stocks at the expense of bonds. But he added: “There remain many important unknowns as to how a Trump presidency will operate and the market may be volatile for a while.”
FED RATE HIKES
Just over 80 percent of respondents who answered a question about the trajectory of U.S. rate rises thought the Federal Reserve would hike rates just twice in 2017, given the length of time it might take Trump to get his legislative program through Congress.
“We expect the Federal Reserve initially to be cautious about raising interest rates for most of 2017 while they assess the outcome and full impact of the fiscal package,” said Andrew Milligan, head of global strategy at Standard Life Investments.
“If it is a sizeable package, however, leading to further pressures on wages and inflation into 2018, then we would expect the Fed to become rather more aggressive into 2018, eventually moving once a quarter.”
Within global equity portfolios, investors raised exposure to Japan almost one percentage point to 18.2 percent, the highest since April 2016. Japanese firms, particularly consumer goods exporters, usually benefit from dollar strength.
The dollar <.DXY> is near 14-year highs against a basket of currencies, whilst the Nikkei <.N225> is up 5 percent in November, following a 6 percent rise in October.
(Additional reporting by Maria Pia Quaglia Regondi, Hari Kishan and Dhara Ranasinghe; Editing by Andrew Heavens)