LONDON Investors moved their portfolios onto a defensive footing during August's market volatility, cutting exposure to stocks and boosting bonds and cash, a Reuters survey shows.
A monthly poll of investment managers, in which 15 took part during August, showed they cut allocations to equities by more than two percentage points on average in balanced portfolios, to 50.4 percent. The average allocation in July was 52.6 percent.
The realignment of investment portfolios benefited bonds, which saw the average allocation climb to 24.4 percent from 23.5 percent, a month earlier.
However, cash saw the biggest boost from the flight to safety in spite of worries about the damaging effects of inflation, climbing to 5.4 percent from 3.7 percent.
Investors blamed the drop in confidence on fears about how much damage will come out of the euro zone debt crisis, and "political brinkmanship" in the United States over raising its debt ceiling.
"In the short term, corporate profitability should be okay, but if the absence of confidence persists, the economic slowdown could turn into something more serious," said Chris Paine, associate director for asset allocation at Henderson Global Investors.
Some respondents said the extent of macroeconomic weakness had caught markets unawares.
"While we had been expecting a 'soft patch' in terms of economic data during the summer months, the weakness evident in many macroeconomic releases has proven to be greater than many market participants had predicted," said Paul Amer, investment manager at Insight Investment.
But while most respondents conceded the economic outlook has darkened, the market falls earlier this month may have gone further than the fundamentals merited, they said.
"Economic fundamentals do justify a fall in share prices, but as ever financial markets may well be pricing in too much bad news," said Andrew Milligan, head of global strategy at Standard Life Investments.
"On balance our view is that markets had over-shot, that it was not right to price in recession although it is necessary to price in slow growth in coming years."
Other managers argued that as well as over-reacting to the possibility of slow, or negative, economic growth, market fears of another systemic crisis akin to the fallout from Lehman Brothers collapse in 2008 were also overdone.
"The system is less highly leveraged than 2008 and expectations lower. (This) implies that markets have over- reacted to news of slower economic growth," said David Millar, partner at Cheviot Asset Management.