(Reuters) - U.S. fund managers recommended increasing cash allocations to their highest in at least seven years in January as low global inflation and surprise easing by major central banks prompted defensive rearrangements to model portfolios.
Recommended cash allocations in a model global portfolio based on a panel of 11 fund management companies polled by Reuters over the past few weeks doubled to 10.1 percent from 5.1 percent last month, the highest since at least May 2007.
Recommended global equity holdings were cut to 50.4 percent, although U.S. holdings within the portfolio rose.
Last year’s dramatic drop in oil prices has extended into this year, pushing Brent crude oil to less than $50 a barrel and keeping alive disinflationary pressures around the globe.
While inflation in the euro zone has turned negative, price rises have slowed sharply in Britain too, and to a lesser extent in the United States, to below their respective central banks’ targets.
“It is not a bad move to raise cash. We have been raising cash in some of our portfolios just to take profits that we had. It continues to make sense we look for a better entry points (into stocks),” said Wayne Lin, fund manager at Legg Mason.
It has been a muted start to the year for U.S. stock markets: the S&P 500 index .SPX has shed around 3 percent.
Within the global equity portfolio, fund managers raised their recommended allocations into U.S. stocks by almost 10 percentage points from last month to 70.8 percent, reflecting continued optimism about the world’s largest economy.
They cut recommended UK stock holdings by half to 4.4 percent from 8.9 percent, while suggested holdings in euro zone stocks were reduced slightly to 10 percent from 11.3 percent.
Suggested allocations into emerging European stocks, however, jumped to 1.8 percent of the portfolio from just 0.4 percent last month. These stocks are seen rising with the European Central Bank’s bond purchase program, which begins in March and will total over one trillion euros to start.
Central banks from Canada to Denmark to Singapore have also recently cut interest rates.
A separate Reuters poll last week showed economists still expect the Federal Reserve to hike rates in the second quarter of this year supported by a strengthening economy despite concerns of low inflation.
In addition to risks from disinflation, a slowdown in China this year could add to risks to the global portfolio. Beijing plans to cut the growth target of the world’s second largest economy to 7 percent in 2015, sources told Reuters on Wednesday.
Allocations into U.S. and Canadian fixed-income securities in the global bond portfolio have increased to 76.3 percent, the highest for at least three years, from 66.3 percent last month.
That has helped the dollar .DXY gain 5 percent against a basket of currencies since the start of the year and it is likely to strengthen further as the gap between the monetary policies of the Fed and other major central banks widens.
“Falling oil prices may have created some opportunities in bonds that have been unduly penalized by the recent selloff,” said Alan Gayle, fund manager at Ridgeworth Capital.
“The safety element in this more volatile investing climate also makes Treasuries appealing over the short term.”
Other changes in stock recommendations include slightly higher Japanese equity holdings, up to 5.7 from 5.1 percent.
Additional reporting by Anu Bararia; polling by Swati Chaturvedi and Siddharth Iyer; Editing by Ross Finley and Catherine Evans