Asset managers and multi-asset teams cut their exposure to global equities in August as the US-China trade dispute threatened to escalate further and Europe continued to show weakness, with firms now wary of the world sliding into recession.
Recent months have already seen investors rushing to the perceived safety of government bonds, sinking the yield on the benchmark US 10-year Treasury below 1.5% for the first time since 2016 and the 30-year below 2% for the first time ever.
Negative interest rates in Europe and Japan, meanwhile, have pushed sovereign debt yields below zero in record numbers.
There is now more than $17trn of negative-yielding bonds worldwide.
Amid the precarious market outlook, UBS told investors in August that it had moved to an underweight position in global equities for the first time since the eurozone crisis.
Speaking to Investment Week, Andrzej Pioch, multi-asset fund manager on Legal & General Investment Management's £4bn multi-index fund range, said the team reduced the global equity exposure from an overweight to neutral position "on the back of an escalation in trade wars, Brexit risk and deteriorating US corporate fundamentals".
Trump re-election risk
He said US President Donald Trump's August announcement that tariffs would rise to 30% from 25% on $250bn of Chinese goods already subject to levies was the "primary trigger" for cutting the funds' equity allocation.
However, the multi-asset portfolio team stopped short of an outright underweight position as Trump will not want to "endure a lot of economic pain" ahead of the US Election in 2020 and is therefore unlikely to impose even harsher measures on China, Pioch explained.
But, should Trump win next year, "he could take a much harder stance with China", which would be a "trigger for us to worry even more about risk factors", leading to an underweight position, he added.
Global head of equities at Columbia Threadneedle William Davies agreed "the risks for equities have risen" on the back of rising tensions on trade tariffs.
He added the risks around economic growth, which the firm expects to fall, has made Columbia Threadneedle "more cautious about the outlook for equities".
Meanwhile, head of multi-asset at Atlantic House Fund Management Charlie Morris said the firm's Total Return fund's equity exposure "has come down from circa 45% earlier this year to 15% over the last month". He added the team has also "reduced exposure to value stocks, which are the most economically sensitive part of our portfolio".
Similarly, Janus Henderson portfolio manager Nick Watson said the firm's multi-asset portfolios had used recent months to "take profits and drift into a modest underweight stance in global equities" due to "trade war volatility" as well as high valuations in the "twilight years" of the economic expansion.
However, he warned: "There is very little historical precedent for this trade war scenario, so trying to trade equity allocations purely around Trump tweets or Chinese RMB fixings is incredibly difficult and unpredictable."
Cross asset strategist at Fidelity International Wen-Wen Lindroth said the "increasingly combustible mix" of market conditions had also seen the firm "shift to more defensive positioning" with a "moderate underweight" in equities "reflecting the increasing risk-off sentiment among our portfolio managers".
She added: "The global economy is in late cycle and punchy valuations could be undone by a trade shock."
Too early to cut and run?
State Street Global Markets' Global Investor Confidence index found investor confidence fell globally in August to its worst levels since April, with the index falling by 8.7 points over the month to 75.9.
Despite waning investor optimism, however, JPMorgan Chase told investors in August the current environment was positive for equities.
The bank said it expects the equity market "pullback" will "not extend for longer than the May one did", adding that "the market will advance into year-end".
Similarly, director of investment at Momentum Global Investment Management James Klempster said the firm has shifted to "neutral from a risk position" compared to an overweight to equities in recent years, but warned investors of reducing risk any further.
He explained: "While there is some increased uncertainty out there we believe a lot of it is priced in already and, as a result, to cut risk further given current market valuations is unnecessary."
CIO of Matthews Asia Robert Horrocks said the firm remains fully invested, adding that it has "no desire to look at defensive equities" to be added to its portfolios "because the valuations in long-term growth businesses looks good".
William Littlewood, who co-manages the £511m Artemis Strategic Assets fund, has also chosen not to trim his global equity exposure.
Despite being "cautious on asset prices", he said in the fund's latest factsheet he is "maintaining a high gross long and short equity position" due to "significant disparities in relative valuations".
He added the reason asset prices rose sharply during the summer this year was because of expectations for central banks to ease monetary policy as a result of weakening economic data.
"Generally, asset prices are increasing because of the perception that the ‘hurdle rate' or alternative, being government bonds, will be held at low levels for longer.
"Price appreciations, for this reason, are, in effect, a pull-forward of returns - where the market is discounting future cashflows at lower rates," he explained.
"[This is] particularly [the case] in predictable businesses that have led the market in recent years.
"This makes us more cautious about asset prices and the scope for future returns."