UK-based investors' equity holdings rose in April to match the 2-1/2-year highs hit in January, with most fund managers clinging to optimism on global growth and company profits, including the tech sector. Reuters' latest asset allocation survey conducted between April 16 and 27 showed overall equity allocations rose more than 2 percentage points from March to 53.6 percent, indicating money managers are regaining confidence following February's wobble.
The survey of 16 British money managers coincided with signs of stuttering growth momentum, especially in the euro zone and Britain, while Chinese factory activity also slowed. Those worries, alongside fears of greater regulation stemming from the alleged misuse of Facebook users' data during the US election campaign, led to a heavy sell off in growth-sensitive tech shares, from social media firms to chipmakers.
Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, said he had pared equity exposure in late-February amid trade tensions and "unsustainably" high corporate confidence. "This being said, our core 2018 scenario is still quite bright - the US and the eurozone should register steady, above-potential growth ...(and) the solid global growth outlook is likely to see corporate profits rise at double-digit rates this year," he said.
Indeed, companies have posted robust first quarter profits, especially in the United States, where tax cuts are seen lifting earnings growth to 24 percent, according to Thomson Reuters. "We still see global equities as attractive in view of the strong corporate profits backdrop," Andrew Milligan, head of global strategy at Aberdeen Standard Investments, said, though he warned of possible setbacks from growth and politics.
Within equity portfolios, British investors raised the weight of US shares to 31.5 percent, also the highest since January, a rise of nearly four percentage points over March. Almost three-quarters of fund managers who answered a special question on tech stocks saw the recent pull back as temporary - a view that seems justified in light of the sector's recent forecast-shattering earnings.
"I don't believe they have (peaked). Their dominance will continue and this makes them a key part of society going forward ... this will provide underlying support for share prices," said Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald. The April poll was also held as oil prices surged to $75 a barrel, stoking inflation fears and driving US 10-year borrowing costs to four-year highs . Some investors now expect four Federal Reserve rate rises in 2018, rather than three.
The survey showed bond allocations at 24.9 percent - the lowest since May 2016 - with several participants having deepened their underweight positions in government bonds. Government bond allocations fell more than seven percentage points to nine-month lows of 34.9 percent. But the share of higher-yielding junk-rated debt rose to 24.4 percent, the highest since October 2016.
Investors' views on most "crowded" trades ranged from emerging equities to dividend stocks, but Russell Investments' portfolio manager Thomas McDonald named short positions in Treasury bonds. "It is virtually consensus across market participants that a higher rate of inflation is inevitable. A lower than expected inflation print, or deterioration in the economic outlook could put a number of participants off balance," McDonald said.
Similarly, short dollar was named as most crowded by Trevor Greetham, head of multi-asset at Royal London Asset Management. But some of those "shorts" might have been shaken out in recent days, as the dollar index has hit 3-1/2-month highs.
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