Schroders’ Keith Wade said the asset manager remains positive overall on the case for equities but has made some amendments to its broad asset allocation in the past few months.
“We had been overweight the US for the last couple of years but we’re now scaling that back because of fiscal cliff worries and because of the way the US has performed, which has been extremely good,” he explained.
The US fiscal cliff – or some $600bn in tax increases and government spending cuts that are scheduled to come into effect at the start of 2013 – has emerged as a major concern of asset managers in recent months.
According to the recent Bank of America Merrill Lynch Fund Manager Survey, 54% of asset allocators cited the fiscal cliff, which threatens to send the US economy back into recession, as their biggest tail risk in October. This is up from 42% in the previous month’s survey.
Wade said: “We are working on the assumption there is a compromise before the end of the year [but] we have learned that politicians like to take things to the brink.”
While broadly cutting allocations to the US, Schroders has began looking at opportunities in European and emerging market equities. Wade said the asset manager has started to overweight the two regions “over the past couple of months”.
The move towards Europe was prompted after the European Central Bank worked to alleviate the eurozone debt crisis and stabilise the single currency, first through its long-term refinancing operations and then through the unveiling of its outright monetary transactions programme.
The removal of eurozone breakup risk has helped European stock markets outperform the US. Google Finance shows the EuroStoxx 50 as being up 12.7% over six months, compared with the 1.7% gain of the S&P 500.
Wade added that the increased allocation to emerging markets is supported by growing evidence that China has avoided a hard landing. Indicators such as purchasing managers’ indices and housing sales have started to improve, suggesting the slowdown in the world’s second largest economy has bottomed out.
Furthermore, the economist noted that other emerging markets have recently seen inflation begin to fall, which improves the purchasing power of their consumers and gives their central banks room to ease policy should it be needed.
