European investors have raised holdings of US equities to four-month highs while sharply cutting debt allocations, a Reuters poll showed, betting President Donald Trump will embark on a spending splurge, accelerating growth and inflation.
The poll of 15 European asset managers was conducted from January 16 to 30, straddling Trump's inauguration and the first week of his presidency, during which he promised to push through $1 trillion in tax cuts and public spending.
US stock markets have raced ahead on hopes that the resulting growth boost will lift company earnings, with the Dow Jones breaching 20,000 for the first time in January, while the S&P 500 and Nasdaq also hit record highs.
"We remain positive on global equities. We see a cyclical rebound of earnings over the next year; reflation policies may support equity prices especially in US and Asia," said Matteo Germano, global head of multi-asset investments at Pioneer Investments.
Reflecting that optimism, US equity allocations jumped to 41 percent of European funds' global equity portfolios, up over 3 percentage points from December to the highest since September.
Overall equity allocations rose to 46.5 percent of global balanced portfolios, the highest since November 2015.
Investors cut overall bond holdings to 38.7 percent, a one-year low, reflecting expectations that higher spending in the United States will also spur inflation, prompting the US Federal Reserve to raise rates.
In mid-January, Fed chair Janet Yellen warned of the dangers of allowing the US economy to run "hot", signalling further tightening. This may have encouraged European fund managers to cut their US bond holdings by 4.5 percentage points to 19.1 percent of bond portfolios, the lowest since June 2015 and the biggest month-on-month fall in two years.
They raised their euro zone bond allocation by 2.6 percentage points to 59.2 percent as the European Central Bank remained committed to its bond-buying programme.
Almost two-thirds of poll participants who answered a specific question on the pace of Fed tightening expected to see one or two rate rises in 2017, while one third said three hikes were possible.
"Inflation is indeed picking up, but we see this as part of a reflationary process, not of overheating," said Jan Bopp, an asset allocation strategist at Bank J Safra Sarasin.
He expressed some scepticism that Trump could deliver on his promises, pointing out that full implementation would mean a significant rise in the Federal budget deficit.
Fiscally conservative Republicans in Congress are likely to oppose this, and 78 percent of poll participants who answered a specific question on Trump's fiscal stimulus plans thought these would fail to match market expectations.
"As time progresses, investors' expectations could focus on the medium to long term, looking for structural measures able to build inclusive and sustainable growth," said Germano.