Global investors have slashed equity holdings to their lowest in at least five years and raised bond allocations to nine-month highs, responding to turbulent stock markets and the potential fallout from China’s slowdown.

The September Reuters survey of 44 fund managers and chief investment officers in the US, Europe, Britain, Japan and China was conducted after the US Federal Reserve held off raising interest rates, citing concerns about global growth, China  and market volatility.

But Fed chair Janet Yellen has signalled that a rate rise is likely before the end of the year, despite lingering concern over US employment and stubbornly low inflation.

At the same time, lacklustre data out of China has heightened fears that the world’s second-largest economy is heading for a hard landing, worsening the outlook for commodity markets and dragging down world growth.

The uncertainty and mixed messages from Fed officials over the last week has helped push global equity markets to a two-year low.

Even a modest US rate increase could hurt foreign currencies

Emerging market equities are down almost 20 per cent in the year to date – even a modest US rate increase could hurt foreign currencies and suck more capital from emerging markets.

Against this backdrop, the proportion of equities in global balanced portfolios was reduced to just 46.9 per cent, the lowest in at least five years. The cash allocation was raised to 6.4 per cent, from six per cent in August.

Within the equity portion, managers cut their exposure to US and Canadian stocks to 37.1 per cent from 41.7 per cent in August. But they raised the weighting for UK, eurozone, merging Europe and Japan equities.

Boris Willems, a strategist at UBS Global Asset Management, said the firm retained its preference for developed equity markets outside of the US.

Sentiment towards emerging markets remained bearish, with few managers saying these were priced attractively enough to consider re-entry.

Currencies are at multi-year or record lows against the dollar. Many are seeing their credit ratings downgraded.