European investors dumped emerging market assets in November, fearing the fall-out from Donald Trump's US presidential election win, and increased their euro zone bond holdings on expectations of continued European Central Bank buying.
The Reuters monthly asset allocation poll showed that worries about Trump's threats to impose trade tariffs, plus expectations that a fiscal splurge will lead to faster US interest rate rises, prompted funds to slash their emerging equity position to 13.3 percent from 16.7 percent.
They also cut their emerging market debt holdings to 12.8 percent from 14.5 percent, the poll of 14 European fund managers and chief investment officers showed. The survey was conducted between November 18-28.
Jan Bopp, an asset allocation strategist at Bank J Safra Sarasin, said emerging markets had had a difficult few weeks since the election, with US Treasury yields rising significantly on the back of Trump's planned fiscal stimulus.
The US two-year Treasury note yields have risen to 6-1/2 year highs and US benchmark 10-year Treasury yields
have hit their highest since December 2015 as investors dumped US government bonds, fearing inflationary policies will undermine their value.
This has made investing in emerging markets less attractive on a relative basis, prompting a sell-off, Bopp said.
MSCI's emerging equity index is set to end November down almost 5 percent, having taken a big leg down after Trump's victory. And the premium paid by emerging market dollar bonds over Treasuries on the JPMorgan EMBI Global Diversified index widened by 36 basis points to a four-month high of 336 basis points in the week after the election. With the dollar strengthening to near 14-year highs, providing headwinds for emerging market currencies, and uncertainty over protectionist policies, investors have become more cautious.
"For the short term we expect the negative trend to continue at a relatively more moderate pace until there is less uncertainty on US trade and monetary policy," Bopp said.
Matteo Germano, global head of multi asset investments at Pioneer Investments, said emerging markets would remain attractive over the medium term - if a free-trade environment persisted.
"If, instead, the US turns protectionist, the growth potential of regions like China, which strongly benefit from globalisation, could be at risk," he added.
The poll also showed that fund managers had raised their euro zone bond exposure to 59.8 percent of global bond portfolios, the highest since March 2015, and up 14 percentage points since July.
Investors expect the European Central Bank (ECB) to extend its asset purchase programme, keeping yields low, following indications from central bank sources.
The bank will decide at its December 8 meeting whether to continue or not.
European fund managers also remain wary of political risk and the rise of populism following the shock Brexit vote, with an Italian referendum on constitutional change in December, and elections next year in Germany, France and the Netherlands.
In their global balanced portfolios, European investors cut overall equity exposure to 40.5 percent, the lowest level in at least five years, and raised their bond allocation to 42.4 percent, the highest since August 2016.
That seems to buck the global trend towards so-called reflationary trades - away from debt and into stocks and commodities. Wall Street has surged this week to record highs and European stocks, down for the year, have made gains in November.
Although 82 percent of those who answered a question on the global bond market said the multi-decade long bull run was over, some took the view that the sharp rebound in long-term yields was not warranted by the health of the US economy.
"The rise in real yields could be retraced in the next six to 12 months," said Raphael Gallardo, a strategist at Natixis Asset Management. "Ultimately, bond yields will have to fall back to their pre-Trump level by the end of 2017, unless we have a significant stimulus package."
Similarly, Bank J Safra Sarasin's Bopp said that from a technical standpoint, the US 10-year had to yield more than 3-3.25 percent before the long-term down trend in yields was broken.