Global funds recommended an increase in bond holdings to the highest level in seven years, at the expense of stocks, and said the recovery in the coronavirus-hit world economy will be U-shaped, a Reuters poll showed.
US stocks surged on Wednesday as hopes for an effective Covid-19 treatment prompted a broad rally and helped traders shrug off bleak gross domestic product data and words of warning from US Federal Reserve Chair Jerome Powell.
But the April 16-30 poll of 34 fund managers and chief investment officers across North America, Europe and Japan – with over $2.5 trillion assets under management – showed a recommended cut to equity allocations to an average 45.1 per cent of their model global portfolio from 45.9 per cent in March. That would be the lowest in seven months.
Another focus has been the unprecedented fiscal and monetary policy from world governments and central banks to soften the economic damage. The European Central Bank at its news conference due at 1330 GMT on Thursday is expected to expand its bond-buying programme.
While the yield on benchmark US 10-year Treasuries US10YT=RR has held around 0.6%, the poll suggested an increase to bond holdings to their highest since the poll series started in early 2013, to 43.3 per cent from 43.1 per cent last month.
“The recent moves in stocks are not justified by any concrete development either in the form of a vaccine breakthrough or on the economic front. The coronavirus lockdowns are here to stay for now and as such the risk is more to the downside for stocks,” said a global chief investment officer at a large U.S. fund management company.
“As for the bond market, it is not pointing at a V-shape or strong recovery and instead it is still signaling risk and very supported by the Fed purchases.”
Responding to an additional question, 60 per cent of fund managers, or 12 of 20, said the global economic recovery would be U-shaped. Four respondents said it would be more like a tick mark and the remaining expected a W- or L- shape.
None expected a V-shaped recovery, a strong rebound from the deep contraction taking place right now.
“We expect the recovery to take a U-shape, with a long bottom phase and a likely slow recovery at the end of 2020 or beginning of 2021. This would depend on the evolution of the virus and the length and severity of lockdown measures,” said Pascal Blanqué, chief investment officer at Amundi, Europe’s largest asset manager.
Those findings line up with a separate Reuters poll of economists, which showed the global economy would suffer its steepest contraction on record this year, with a longer, U-shaped recovery more likely.
“At the moment it looks like the virus and associated mobility restrictions are going to remain for a while. Governments and citizens are wary of renewed outbreak and are likely to only partially reopen economies in the near term,” said Benjamin Suess, director at UBS Asset Management.
“Therefore, a gradual normalization of economic activity is the most likely scenario but others remain possible.”
The US economy suffered its sharpest decline in 11 years last quarter, with GDP contracting at a 4.8 per cent annualised rate, marking the end of the longest economic expansion on record.
Another Reuters poll of economists predicted the worst is yet to come.
On Wednesday, the Fed said the ongoing pandemic would “weigh heavily” on the near-term outlook and posed “considerable risks” for the medium term.
“We think we are very far from out of the woods, with still huge amounts of uncertainty and markets will remain very much sentiment-driven,” said Kevin Thozet, a member of the investment committee at Carmignac.
“With market breadth having already become extremely low, we maintain a limited exposure to equities and remain ready to take a more defensive bias if necessary.”
In response to an extra question, more than 85%, or 18 of 21 fund managers, said the risk was skewed more to the downside for stock prices over the next three months.
“The risks are skewed to the downside for stock prices, which are driven by material uncertainties. Furthermore, economic data and corporate earnings have great scope to shock on the downside,” said Craig Hoyda, senior quantitative analyst at Aberdeen Standard Investments in Edinburgh.
When asked about bond yields, 75 per cent of 20 respondents said the risk was skewed more to the downside.
“Bond market volatility is very high. Yields are already very low, but they could drop further if economic activity disappoints and central banks flood the world with cheap money,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.
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