US managers shun stocks for corporate bonds on global fears

NEW YORK (Reuters): US money managers dumped global stocks and sought high-quality corporate bonds in May as concerns over Europe’s debt crisis and perceived risks to the US economy intensified, a Reuters poll showed last week.

The poll, which surveyed 15 US-based fund managers between 16 and 29 May, found the firms allocated an average of 59.5 per cent to equities, the lowest percentage in over 14 months and a notable reversal from 66.8 per cent last month.

Bonds benefited from the move out of equities, as firms allocated 30.8 per cent into fixed income, the most in seven months and far exceeding April’s 26.7 per cent. Investment-grade corporate bonds, in particular, rebounded to 33.9 per cent in May from last month’s 29 per cent, while even the crisis-hit euro zone saw its allocation rise, to 15.2 per cent from 14.6 per cent.

The global equity market, as measured by MSCI, is down roughly 9 per cent in May alone as investors fret about a possible Greek exit from the euro and that growth momentum in the United States and China is slowing.

The euro hit its weakest level versus the dollar in almost two years in Asian trading on Thursday, at $1.2358, and is on course for its biggest monthly drop since September after falling 6.6 per cent this month.

The single currency has also been depressed by worries about the political situation in Greece, and by fears that the cost to Spain of supporting its ailing banks will push its borrowing costs to unsustainable levels and force it to seek a bailout.

“The markets are facing increased macro headwinds from the sovereign debt showdown in the European Union,” said Alan Gayle, Senior Investment Strategist at Ridgeworth Investments.

Euro zone stocks attracted 10.2 per cent of investors’ global equity portfolios, down from 12.8 per cent in April and the lowest allocation in the past 14 months. The share allocated to emerging equity markets in Europe also fell sharply, to 1.8 per cent from 4.4 per cent in April.

While fears persist that the US economy could fall off a “fiscal cliff” and into recession next year, U.S. and Canadian stocks collectively attracted 65.5 per cent of the firms’ equity portfolios, outpacing last month’s 58.6 per cent.

The Congressional Budget Office and others have warned that a wave of US spending cuts and tax hikes set to take effect in January unless politicians agree on ways to delay at least some of them could tip the world’s biggest economy into recession. Strong earnings and the greater resilience of the US economy made US equities more attractive than those of other regions, said David Goerz, Chief Investment Officer of HighMark Capital Management.

Regions that suffered in May included Asia ex-Japan, whose share of firms’ equity portfolio fell to 6.6 per cent from 7.9 per cent in April, while Africa and Middle East equities fell to 0.8 per cent from 1.6 per cent in April. Equities in Japan and the United Kingdom also saw moderate declines in demand.

Demand for investment-grade corporate bonds increased almost 5 percentage points to 33.9 per cent, but demand for government bonds fell to 34.9 per cent, the lowest percentage in the 14 months on record.

Other forms of credit such as mortgage-backed securities and inflation-protected securities attracted 16.6 per cent, a 14-month high.

“At negative real yields, there really isn’t any value to holding longer-duration assets on the fixed income side,” Goerz said about Treasuries.

High-yield “junk” bonds attracted 14.5 per cent of bond investments, down slightly from 15 per cent in April, showing a continued search for return in fixed income.