European fund managers made their highest allocation to equities this month since January 2011 and cut bond positions that were already below long-term averages, a Reuters survey showed on Thursday. Fund managers in the poll put 49 percent of their global assets in equities in July, up from 48.3 percent in June and against a long-term average of 46 percent.
They showed a strong appetite for risk, shrugging off concerns about high equity valuations, and said continued support from central banks would provide a benign environment for equities until the year-end. "While global equity markets have moved higher mainly on expanding multiples, rather than strong earnings, this is not currently giving out a warning signal," said Steven Steyaert, a portfolio specialist at ING Investment Management.
"Risk premiums remain elevated and with ongoing monetary support, leading to historically low volatility, a period of higher valuations can be justified." The survey polled 18 asset managers in continental Europe between July 14 and July 29, at a time when geopolitical factors in Ukraine and the Middle East failed to dent enthusiasm for global markets, though weaker-than-forecast European data caused some jitters. "We have downgraded Europe from small overweight to neutral. Euro zone macro data may be on an improving trend, but in general these come far below expectations," Steyaert said.
North American equity allocations reached 39.5 percent in July, their highest since July 2012. Fund managers cut their portfolio allocation of bonds from 37.7 percent in June to 37.1 percent in July, as ongoing monetary support from central banks led to low bond yields globally. The long-term bond holding average is 39 percent, a level that hasn't been seen since July 2013.
"High bond yields appear to have reached a valuation ceiling, while equity multiples still have room to expand," said Boris Willems, a strategist at UBS Global Asset Management. Managers increased their holdings of British bonds to their highest since February, upping them to 4.7 percent in July from 2.9 percent in June. Holdings of North American bonds were cut by 2.1 percentage points.
They favoured investment-grade bonds in July, increasing their holdings of this class to 27.9 percent of global bond portfolios, the highest since September 2013. Holdings of government securities rose more than five percentage points to 49.7 percent, their highest since February, while holdings in high-yielding bonds fell. In equity markets, the fund managers were most overweight in financial stocks, saying that the improvement in the euro zone periphery should underpin performance in the sector. They disliked consumer staples, citing concern the stocks were expensive and earnings expectations were too optimistic.