Reuters Poll Shows Stock Holdings are Rising

Yesterday, Reuters released the results of a poll it took among 44 investment companies in the United States, continental Europe, Japan and Britain, which showed a return to equities in their portfolios. This is good news for the stock market, bad news for the commodities markets, and a sign that things are starting to return to normal. At the same time, the return wasn’t substantial enough to justify opening the champagne just yet. Holdings are still below year-end 2007 levels and below the long-term average.

In Reuters' own words, “Over all, the average stock allocation in a mixed portfolio in May was 59.5 percent, up from 59.1 percent in April. The long-term average is 60.3 percent. Investors trimmed bonds to 31.2 percent from 31.3 percent. They kept cash levels at an above average 5.4 percent, a sign of continuing caution. The remaining investments were in alternatives such as property, commodities and hedge funds.”

What is happening, it appears, is a realization among money managers that there are some bargains to be had in the global stock markets after the tough first quarter of 2008. The above-average level of cash is likely to decline in the coming months as managers realize their bonuses for the year are going to be pretty weak if they don’t move out of cash. In addition, anyone who moved into oil or other commodities can book a hefty profit now, take the proceeds and buy top quality equities at not-quite-fire-sale levels. This will bring down commodity prices, but this may be mitigated by the continuing weakness of the US dollar, which is falling for structural reasons (a busted federal budget and a huge trade imbalance).

Reuters noted, “On average, 11 US-based fund management firms interviewed between May 14 and 28 showed a high allocation to stocks but an increase in bonds as well. The group held 64.4 percent of their assets in equities, up from a downwardly revised 64.0 percent in April, with cash down to 2.5 percent from 3.0 percent and bonds up at 30.4 percent from an upwardly revised 29.3 percent in April.” The falling cash is the significant factor here.

In Europe, “The monthly survey of 12 investment houses in continental Europe showed equities holdings fell slightly to 48.3 percent of their portfolio after hitting 48.6 percent last month, their highest since December. Bond holdings rose to 37.1 percent from the previous month's 36.5 percent -- their lowest since December. Cash fell for the second straight month to 4.6 percent.” This is simply a murky picture, but increased bond holdings and falling cash is promising.

As for the Tokyo markets, “The poll of 11 Japan-based institutional investors showed their average stock allocation fell to 54.7 percent from 56.4 percent in the previous survey. Bond allocations rose to 41.1 percent from 38.8 percent while the weighting for cash slipped to 4.7 percent from 5.4 percent in April.” Quite similar to the situation in Europe.

With regard to the UK, “A poll of 10 fund management firms showed equity holdings rose to 70.6 percent in May from 67.3 percent in April, although they are still well down on the 72.3 percent seen a year ago before the credit crisis began. Bond positions fell to 16.3 percent in May from 20.7 in April, while cash positions increased to 9.7 percent from 8.5 percent in April.” Cash rising while bonds fall suggests a shift in preparation for further equity purchases, but the UK also has a debt problem that simply makes bonds unattractive.

It’s still too early to proclaim the end of the mess, or even the beginning of the end. There is a long summer of doldrums ahead as the markets try to recover their confidence, and Europe will be more or less closed in August (it always is). Four months from now, the world will know if this was a false dawn or not.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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