Citi: Global asset managers remain keen on risk assets: Chinese equities gain favor as bond duration is cut

Risk appetite remains, but how have allocations changed?

Citi compiled the public views of major asset managers with more than 20 trillion dollars in combined assets under management: compared with last month, sentiment improved only for developed-market equities and commodities. Managers still favor emerging-market equities, but have reduced their allocations to emerging markets outside China.
US and Japanese equities were already overweight and saw small increases this month; UK equities moved from underweight to neutral, while EU equities became the only equity market with a significant underweight.
These results are based on institutions’ publicly stated allocation views. Citi converts them into a standardized score and averages the scores of institutions expressing an explicit view; the institutions covered vary somewhat by asset, and public views may also be published with a lag.

The allocation preference for Chinese equities continued to improve. Among managers expressing an explicit view on the asset, 80% advocate an overweight, making it the asset with the strongest consensus by direction of view.
Japanese equities attracted bullish views from the largest net number of managers; bullish views on emerging-market equities had broad participation, with no opposing views. Managers remain positive on risk assets, mainly because of resilient economic growth and AI-driven earnings growth.
This optimism is more selective: equity concentration and doubts about returns on AI investment have prompted some managers to choose securities more carefully.

Managers have become more cautious on interest-rate bond duration: core European government bonds moved from a positive allocation to neutral, peripheral government bonds shifted to underweight, and US Treasuries were also slightly underweight.
The background summarized by Citi includes an energy shock hindering disinflation, central banks turning more hawkish, and fiscal concerns and substantial AI-related bond issuance pushing up long-term yields. After the Federal Reserve completed its first rate hike in more than three years in September, some managers expect at least one more hike, while also believing that markets have priced in too much tightening.
Bond views are mixed: some managers favor UK government bonds or are adding duration as yields rise; others continue to underweight long-term US Treasuries. Some managers also noted that rising stock-bond correlations have weakened bonds’ diversification role.

Managers increased allocations to energy, base metals and precious metals this month, maintaining an overweight in all three commodity groups; among managers expressing an explicit view, none were bearish on any commodity covered by the report.
Price performance has diverged: more hawkish central banks have weighed on interest-rate assets and precious metals, with the latter retreating sharply after surging last month; Middle East tensions and concerns about potential supply disruptions have driven energy prices higher.
Credit allocations changed little from last month: emerging-market corporate bonds and European high-yield bonds were slightly overweight, while US and European investment-grade bonds remained underweight. Citi also noted that narrow spreads have left most managers neutral or underweight on credit assets.