By Tushar Goenka

BENGALURU, (Reuters) – Global funds identified higher inflation as the greatest risk for their portfolios in the next three months. This resulted in a reduction of recommended bond holdings by nearly three years, and an increase in equities exposure, according to Reuters.

These views are supported in part by the existing emergency monetary stimulation that large central banks such as the Federal Reserve or the European Central Bank have not yet begun to unwind.

From September to October, 35 chief investment officers and fund managers in America, Europe, and Japan participated in a Reuters survey. Their recommended equity allocations increased from 49% in September to 50.3% in Oct.

The U.S. stock indexes rose to new records on Thursday, unaffected by the slower economic growth than was expected last quarter.

Many policymakers believe that the inflation surge will end and will be stopped by supply chain disruptions, energy price increases and other factors. Some asset managers and traders are worried that this might not be true.

Matteo Germano is global head for multi-assets at Amundi. “Markets move in quicksand, and the permanent inflation story is getting a boost,” he said. Given the low yields of bonds, equity is the best place to be, however, in an already difficult valuation environment any increase in inflation should lead to a reassessment.

When asked about their primary risks to portfolio allocations in the coming three months, the respondents almost equally divided between lower inflation, higher economic growth and new coronavirus variants.

That range of risks broadly echoes economists, who in a separate Reuters poll https://www.reuters.com/business/central-bank-moves-supply-shocks-among-top-risks-global-economy-2021-10-28 mostly agreed with central banks calling the current inflation surge transitory but increased their inflation forecasts and hardly moved their growth estimates.

Amundi’s Germano said, “Overall, investors are becoming more uncertain, riskier and with less upside potential in short-term.”

Still, the poll found that money managers suggested fixed-income holdings of an average 39% to the balance global portfolio. It is the lowest figure since late 2018 This was 39% last month.

Nearly two-thirds (22 respondents) said that they will maintain their current portfolios. Rest of the respondents were divided between increasing and decreasing exposure to riskier assets.

Keith Lerner (co-chief investment officer, Truist Advisory Services), stated that “we aren’t increasing equities” because of the significant overweight.

With the growth crisis in our rearview mirror and moving into next year we expect a modest increase given the year’s run. Although we remain optimistic and realistic, there will be volatility from Washington because of many unresolved problems.

(Reporting & Polling by Tushar Genka in BENGALURU, Fumika Inoue in TOKYO; Editing done by Ross Finley und Emelia Sithole–Matarise