The substantial run-up in stock prices this year appears to have taken its toll on the outlook for equities markets among asset managers, as they turn to less risky investments, according to HSBC's quarterly fund manager survey. That's a switch back from the sentiment reported in the bank's previous poll in September, when optimism had shifted towards equities.

Over half of fund managers polled (56%) in the survey published yesterday hold a positive view on bonds in the fourth quarter of 2009, up from 30% in the third quarter. Seven in 10 respondents are bullish on global emerging-market and high-yield bonds in the fourth quarter, up from 43% in Q3, a view put forward by others recently. Meanwhile, 57% hold an overweight view on European bonds for Q4, up from 38%.

Managers are less optimistic about equities, with a third of respondents overweight in the fourth quarter, up from half the quarter before. While 57% remain bullish on Greater China equities, that's down from 75% in Q3. One-fifth (22%) are positive about North American equities in the fourth quarter, compared to 18% in the third.

"The low interest rate environment has diminished appetite for cash this quarter, as investors seek stable growth in still-volatile market conditions," says Bruno Lee, HSBC's regional head of wealth management for Asia-Pacific. "While equities will continue to provide growth opportunities, investors are less likely to expect the returns they enjoyed from the sharp rebound in global markets in mid-year."

He notes that bonds have performed strongly this year, with the high-yield sector leading the way. "However, with continued economic uncertainty," cautions Lee, "investors may consider taking positions in the high-grade corporate sector with short-to-medium tenors to reduce interest rate risk."

As for allocations last quarter, across all asset classes, high-yield and emerging-market bonds combined posted the biggest net inflows in Q3 (of 19.4% by AUM).

However, equity funds also saw inflows. Among equity funds, Asia-Pacific ex-Japan and North America equities posted the biggest net inflows in the third quarter (+7.9% and +6.3% respectively by AUM), while emerging-market (+1.7% inflows) and Greater China equities (+1.6%) continued to take in money, albeit at a slower pace.

"In Q3, investors sought yield from bonds in a near zero interest environment, while selectively pursuing growth in equities in markets like Asia which is emerging from the financial crisis faster," says Lee. "We will continue to see investors watching the markets closely: investing for the short-term, ready to rebalance and adjusting their portfolios to gain maximum yield."

The HSBC Fund Flow Tracker, which represents cumulative dollar value of money flows covering the past 13 quarters, showed that the pace of equity fund inflow slowed in the third quarter. Q3 net inflow volume for bond funds returned to the highs of Q1 and Q2 2007.

Accounting for 16.5% of global funds under management, 13 large global asset managers participated in the survey: AllianceBernstein, Allianz Global Investors, Baring Asset Management, BlackRock, Fidelity Investment Management, Franklin Templeton Investments, HSBC Global Asset Management, Invesco Asset Management, Investec Asset Management, JP Morgan Asset Management, Prudential Asset Management, Schroder Investment Management and Société Générale.

The survey analysed participating fund firms' AUM breakdowns at the end of the second and third quarters and also collected fund managers' views for Q4 on several asset classes and markets.