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Funds follow central bank guidance for investment decisions

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BENGALURU – Investment decisions over the next three months will be influenced by the future direction of central banks, according to global fund managers in Reuters polls that recommended increasing exposure to equities and reducing bond holdings in June. .

The MSCI Global Stock Index hovered near record highs on Wednesday and was set for a fifth consecutive month of gains as most major economies continue to rebound from pandemic locks.

Fund managers and investment directors from the United States, Europe and Japan in the Reuters Asset Allocation Survey of June 17-30 recommended increasing equity holdings to an average of 49.5% of their model global portfolio, from this year’s low of 48.7% in May.

“The valuations of stocks are adjusted in absolute terms but not relative to bonds, that is, in the medium term: there is no alternative to investing in stocks,” said Pascal Blanqué, the group’s chief investment officer at Amundi.

At the same time, the survey suggested that the fixed income allocation fell to an average of 39.6% of the balanced global portfolio, from this year’s high of 40.3% in May.

“The yield outlook for traditional government bonds looks bleak. Low initial returns mean that potential returns are low; Even in the event of an economic shock, there is limited room for bond yields to fall further, ”said Justin Onuekwusi, fund manager at Legal & General Investment Management.

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When asked about the likelihood of a significant correction in the global equity and bond markets in the near term, most fund managers said it was unlikely.

“We expect the markets to remain in a holding pattern, the waters appear to have remained calm in the financial markets and we will need to see a big surprise to keep this trend calm. But this does not mean that they are really safe, since strong currents may soon arrive, ”said Blanqué de Amundi.

“Communication from central banks, particularly the Federal Reserve, about its reduction program will be key. But a lot would also depend on the actual unemployment and inflation figures. “

FACING FORWARD

However, a separate Reuters poll of fixed income strategists last week showed a sell-off in bond markets is likely in the next three months as central bankers look at the exit door from politics. emergency response to a pandemic.

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In the latest survey, nearly two-thirds of asset managers, or 14 out of 22, in response to another question, said that investment decisions over the next three months would be driven by the future direction of central banks.

“The market has quickly moved from concerns about rising inflation to what the central banks will do, and the Fed in particular. The inflationary push will last for some time, as transitory factors will be replaced by more structural ones, ”said the investment team at Generali Investments Partners.

“However, we see a high level of medium-term uncertainty in both the inflation and growth outlook, as the risk of a fiscal and monetary cliff is on the rise. News from the Fed will likely be the main driver for the summer. “

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When asked when the Fed would announce a phase-out plan for its $ 120 billion monthly asset purchase program, all but one of the 23 fund managers said in September, including nine they expected to occur at the symposium. from Jackson Hole in August.

But a majority said the US central bank would not start reducing its monthly purchases until next year.

Those views align with the findings of separate Reuters surveys of economists and bond strategists.

“The Fed’s phase-down announcement is likely to come in August or September, but it will be kind of an early warning. Monetary policy will remain accommodative and any normalization is still some way off, ”said an investment director at a large US fund management company.

“We suspect that the debate among US politicians is more about whether the economy would need the billions of dollars of support or not. Therefore, we consider this to be positive for financial markets and the economy. “

(Information from Tushar Goenka, survey by Indradip Ghosh in BENGALURU and Fumika Inoue in TOKYO; edited by Rahul Karunakar and Alex Richardson)

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