Japan funds cut Asian stock weighting on emerging market jitters

 

 Japanese fund managers cut their assets allocated to equities in August, mainly in Asian markets, as worries the US Federal Reserve's tapering of its stimulus could draw more capital out of emerging countries, a Reuters poll showed on Friday.

 

A survey of eight Japan-based fund managers, polled between August 19 and 23, also found the managers lifted their assets allocated to bonds in Europe to a 10-month high, as new data suggested that the euro zone and British economies were crawling out of recession.

 

The managers cut their overall allocation of assets to shares to 43.0% this month from 43.7% in July, and reduced weighting for Asian shares to four-year low of 5.6% from 6.1% in July.

 

They also raised their cash allocation to a four-month high of 4.1% from 3.9% in July, while there were no changes in weightings of property or alternative assets.

 

"The Fed's tapering may benefit the US economy but not necessarily the global economy especially when funds are flowing out of emerging countries," said a fund manager at a Japanese asset management firm, who declined to be identified because of company policy.

 

Global markets have struggled to adjust to the idea that the Fed will trim its $85 billion a month bond-buying programme, hammering assets in emerging countries in Asia and elsewhere, where it was feared the end to cheap money would reverse the flow of capital.

 

Indonesia and India, which require the inflows to fund balance of payments shortfalls, saw their stock markets fall sharply as their currencies sank to multi-year lows.

 

Asian equities as measured by the MSCI Asia-Pacific ex-Japan index dropped to a seven-week low on Wednesday.

 

Within their equity portfolios, the managers raised weighting for Japanese shares modestly to a one-year high of 37.0% from 36.8% in July.

 

"Such factors as expectations for the government's growth strategy may lift Japanese shares, but gains are likely to be limited as their valuations have become expensive," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

 

"A further sell-off in emerging market shares could also be negative to Japan."

 

The Nikkei is down about 15% since it hit a 5-1/2 year high in May, weighed by worries about the Fed's tapering and a slowdown in China. Even so, it is still up 30% this year.

 

RAISING EUROPEAN BONDS

 

Bond weighting for the U.K. and Europe rose to 6.9% from 6.7% in July, and to 22.2% from 21.8%, respectively, on signs of economic growth, with data showing the U.K. economy had grown more than expected in the second quarter.

 

Germany also confirmed solid second-quarter growth.

 

"Yields in the global market are rising on the economic recovery and expectations that the Fed will trim its monthly bond buying," Meiji Yasuda's Kodama said.

 

But the asset managers reduced weighting for bonds in Canada and the US marginally to an eight-month low of 26.9% from 27.9% in July, as US long-term yields hit a two-year high.

 

Earlier this month, benchmark US 10-year Treasury yields hit 2.94%, their highest levels since July 2011. As yields rose many investors sold bonds and moved to the sidelines, anticipating increased volatility heading into the all-important Fed meeting on September 17-18, where the decision when to start tapering could be taken.