Sovereign investors to cut US exposure, eye trade wars

The number of sovereign investors planning to underweight US assets in the next 12 months has jumped to 43 percent, a survey showed, with almost a third citing trade wars and increased protectionism as the biggest tail risk.

The shift in sentiment in the poll, conducted by the US-based Sovereign Wealth Fund Institute in February, reflects a turbulent month in global stock markets and moves by US President Donald Trump to slap tariffs on a variety of imports.

The survey, which covered 25 pension funds, sovereign wealth funds and other public asset owners with an estimated $1.21 trillion in assets, showed those planning to underweight US exposure in the next 12 months had leapt from 25 percent in the December survey.

Meanwhile, the percentage of investors planning to overweight the US slumped to 8.7 percent from 20.8 percent. Around a third also said they planned to underweight passively-managed global equities, up from just 14.3 percent in December.

The reduction in risk appetite follows a rollercoaster ride for global equities in February after US wage growth numbers sparked fears the Federal Reserve was behind the curve and would need to raise interest rates more quickly than expected. Both the S&P 500 and the Dow Jones suffered their biggest percentage drops since August 2011 in early February, and ended the month down around 4 percent.

The survey, sent to media late on Tuesday, also revealed a notable shift in investor thinking on the biggest tail risk, with trade wars and increased protectionism leapfrogging a stock market bubble into pole position. Seven respondents chose trade wars in the February poll, up from just three in the previous quarter.

Trump has repeatedly rattled the sabre on trade over the past month, introducing measures against imported washing machines and solar panels. In early March he turned up the heat, threatening hefty tariffs on steel and aluminium imports.

The moves triggered another equity market sell off as investors fretted about retaliation from exporting countries.

Not surprisingly given the spike in volatility in February, there was an increase in the number of asset owners saying they planned to overweight cash in the next 12 months, to almost 50 percent, up from 41.7 percent in the previous quarter.