Global investors cut equities to 11-month lows in June and raised cash levels as the US ratcheted up trade tensions, but a majority of Reuters poll participants still expect world stocks to end 2018 higher after a volatile first half. The monthly asset-allocation survey of 49 wealth managers and chief investment officers in Europe, the United States, Britain and Japan was carried out June 18-29.
During this period the US administration escalated its ongoing trade dispute with the US's key trading partners, sending global equities into a tailspin. Also in June, the US Federal Reserve raised interest rates for the second time this year and the European Central Bank signalled it would conclude its bond-buying by the end of the year.
The poll showed investors took risk off the table, cutting their global equity holdings to 46.8 percent, the lowest in almost a year and down 3.3 percentage points since January. Cash levels rose from 4.8 percent to 5.4 percent, the highest since March 2017.
"All year we have been warning that 2018 will be a battle between profits and politics," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
On the one hand, the upswing in the global economy provided a favourable backdrop for double-digit corporate profits growth, he said.
"On the other hand, the recent warnings from President Trump about widening the US's trade concerns from steel and aluminium into cars and IT are dragging on investor sentiment and could lead to a noticeable shock to business activity."
Despite these misgivings, 89 percent of poll participants who answered a question on the outlook for global equities expected the MSCI all-country world index to end the year higher.
The index is flat at the halfway mark, but Christopher Peel, chief investment officer at Tavistock Wealth, expects it to end the year up 5 to 10 percent, with buyers returning in the fourth quarter after a range-bound summer.
"The economic fundamentals are highly supportive of risk assets such as equities and commodities," he said, adding that although the "white noise" from President Donald Trump's administration had increased volatility across financial markets, it had not changed the underlying strength of the economy or consumer behaviour.
But investors remained concerned about the impact on emerging markets. The worry is that US tariffs levied on imported goods from China, Europe and elsewhere will disrupt global supply chains and stymie economic growth.
Emerging stocks fell almost 5 percent in June, extending year-to-date losses to 8 percent. In the poll, investors trimmed their emerging equity exposure slightly to 12.4 percent, but rolled back emerging bonds by 1.3 percentage points to 9.7 percent.
This followed a turbulent May in which the Turkish lira and Argentine peso came under intense selling pressure. The selling spread to other emerging-market currencies in June as the dollar index climbed to an 11-month high.
And 63 percent of poll participants who answered a question on the US dollar's surge against emerging market currencies said it had further to run.
Salman Baig, an investment manager at Unigestion, cited political risks, such as upcoming elections in Mexico and Brazil, and the tightening Fed as reasons to be wary.
"A rising dollar makes dollar-denominated EM debts more expensive for local borrowers, thereby causing investors to demand higher premiums for bearing this risk," he said. "It also seems many EM countries are not in much better shape than they were during the 2013 tantrum."
John Husselbee, head of multi-asset at Liontrust, was among the 30 percent who expected the dollar surge to peter out.
"(It) was justified by the perception of weaker relative growth outside the US, helped no doubt by tax cuts," he said. "As we go further into the year, this is likely to unwind as other economies seem ready for catch up."
Investors showed a preference for US stocks, raising them 1 percentage point to 39.6 percent, the highest since January, and cutting eurozone equities to 19.2 percent, the lowest since December.
They also raised US bond holdings to 39.2 percent, the highest since May 2017, and cut eurozone bonds to 28.2 percent, the lowest in a year.
In June, the ECB said interest rates would stay unchanged at least through next summer, wording that pushed back rate hike expectations by three months to September 2019.
But poll participants were pretty evenly split over whether the ECB would raise rates before President Mario Draghi leaves office in October 2019, with 59 percent saying it would.
"I suspect he will raise rates once, just before his departure, in an almost symbolic move to show that the era of negative rates is over," said Rob Pemberton, investment director at HFMC Wealth.
But others argued it was a close call, with Michael Ingram, chief market strategist, WHIreland Wealth Management, saying the ECB had given themselves "wriggle room".
"Given weakening economic momentum, downside risks to the outlook via trade and geopolicial risk and the current glacial progress to hitting the ECB's inflation target ... the odds are rates will remain at current levels for an even longer period," he said.
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