LONDON Global investors piled into stocks and high-yield credit in January and slashed their cash buffers to a two-year low, betting that central banks would keep markets awash with cash and that the worst of the euro crisis is over.
In a month that saw global stock markets gain nearly 5 percent, after ending 2012 more than 13 percent higher, investors took their stock holdings to a nine-month high and bonds to a five-month low, the January Reuters asset allocation poll showed.
Nearly 80 percent of poll respondents said it was time to move more broadly towards equities and away from fixed income and fund managers resumed a shift back into stocks that had been interrupted in December by year-end profit-taking and worries over the U.S. fiscal cliff.
In another show of rising risk appetite, the 53 leading investors in the United States, Europe and Japan who took part in the poll, lifted their holdings of euro zone stocks to a 10-month high on average, with more than 80 percent convinced that the worst of the euro debt crisis is over.
The poll was conducted on January 16-30.
Italian and Spanish bonds have been flying this month while the S&P 500 reached a five-year high, helped by loose monetary policy with 94 percent of poll respondents saying they did not expect any major central bank to reverse stimulus this year.
"The main investment theme in 2013 will be the hunt for yield, which will be achieved by increasing exposure to riskier assets in what we believe will be a benign global macro scenario," said Andrea Conti, head of macro research at Italy's second-biggest asset manager Eurizon Capital.
Some investors warned though that risks remained including elections in Germany and Italy, recession in Europe and U.S. debt talks. Market ebullience might therefore be due a reality check, they said, and more volatility is likely, at least in the short term.
"We still believe that stock prices will make progress during 2013 but the path will probably not be smooth," said Chris Paine, director of asset allocation at Henderson Global Investors.
"Though the tail risks of last year have diminished, the on-going process of deleveraging suggests that economic growth will continue to be slow."
The IMF trimmed its 2013 forecast for global growth to 3.5 percent last week, from 3.6 percent, saying a stubborn euro zone recession and weakness in Japan would weigh on the global economy this year before a rebound in 2014.
The polls were conducted before data showed the U.S. economy unexpectedly contracted in the fourth quarter.
Steven Steyaert, portfolio specialist at ING Investment Management, said he was becoming more cautious in the short term although he remained positive on risky assets overall.
"The reason why we're getting a bit more cautious is because we see that everybody is moving in the same direction while we still see short-term risks related to the Italian elections or to the American budget discussions," he said.
The increase in stock holdings to 52.1 percent of global balanced portfolios on average in January, from 49.7 percent last month, and the drop in bond holdings to 37.2 percent, from 38.8 in December, were the biggest month-on-month allocation moves in at least three years.
The increase in allocation to stocks was seen across regions.
In the United States, investors were the most bullish in seven months, helping fuel a market rally that pushed the benchmark Standard & Poor's 500 index to a five-year high, on the heels of the fiscal cliff compromise in Washington.
Japanese fund managers raised their asset allocations to both shares and bonds while cutting cash, expecting monetary easing to support global asset prices.
But the survey also showed Japanese Prime Minister Shinzo Abe's efforts to kick-start the economy by aggressive money-printing have barely boosted Japanese investors' appetite for domestic stocks. They raised Japanese shares only slightly to 33.4 percent, from 32.9 percent last month and the month before.
Several poll participants saw room for a bigger shift into equities but said investors must be selective, especially in Europe, and focus on companies that are mostly active outside the sluggish domestic EU market.
"You should concentrate on those and leave out the domestically exposed," said Elke Speidel-Walz, chief investment strategist Germany at Deutsche Bank Private Wealth Management.
"So it's more of a question of choosing sectors and the right firms than going in or not going in."
(Additional reporting by Chris Vellacott and Dasha Dasha Afanasieva in London, Maria Pia Quaglia in Milan, Sarmista Sen and Namrata Anchan in Bangalore, Hideyuki Sano in Tokyo and David Randall in Washington; Graphic by Vincent Flasseur; Editing by Susan Fenton)