British fund managers have taken equity allocations down from two-year highs, having grown especially wary of pricier US shares as Western central banks prepare to wind down their super-easy credit policies. Reuters' latest monthly asset allocation poll was carried out between October 16-27, a time when world stocks surged to new record highs against a background of robust economic data. But with economic growth accelerating or inflation rising, hawkish central bank action is becoming more likely.
This week, the Bank of England (BoE) is seen delivering its first interest rate rise in over a decade while the European Central Bank (ECB) pledged at its October 26 meeting to halve bond purchases from early 2018.
The survey of 15 money managers found equity exposure had been cut by 3.5 percentage points to 49.9 percent, the lowest since July, with US allocations slashed by 4.3 percentage points to a 14-month low of 28.5 percent. Mark Robinson, chief investment officer at wealth manager Bordier & Cie (UK), said global growth - still fragile - could take a hit should central banks mishandle the transition to a tighter monetary policy.
So far, world stocks are unruffled, scoring successive all-time highs, and heading for a record 12-month long winning streak. The US S&P 500 index is up 15 percent and tech stocks have soared 24 percent this year. But Robinson said that at current elevated levels, markets faced barriers in the form of "tighter monetary conditions, squeezed consumers, stretched equity valuations, compressed bond yields, escalating debt levels and geopolitical tensions". While markets could ignore these issues for the rest of the year, "the outlook beyond this does look much more uncertain," he added.
Around 40 percent of the poll participants who answered a special question on the subject predicted the US Federal Reserve, the BoE and the ECB would be in policy-tightening mode by end-2017, albeit in different ways. Some of the responses were received before the ECB meeting. "Barring a crisis, it is very unlikely that any of the three central banks will miss an opportunity to act with a seemingly docile and acquiescent market," said David Vickers, senior portfolio manager at Russell Investments.
While euro zone stock holdings stayed at 17 percent - about 5 percentage points above end-2016 levels - many investors saw the market as better value than Wall Street. Investment bank UBS said this week it had revised up European earnings estimates for the first time in a decade, while cutting US forecasts. Larry Hatheway, head of GAM Investment Solutions, noted ECB policy tightening would commence only next year. He saw a sudden unexpected rise in inflation as the biggest risk, simultaneously hitting both bond and equity prices.
"Barring that outcome, the best opportunities are in European and emerging equities, where earnings growth rates are best supported by the cyclical improvement in the world economy," he said. European shares could also benefit from a new German finance minister to replace Wolfgang Schaeuble, a leading advocate of austerity programmes for Greece and the rest of the euro zone. The 75-year old Schaeuble has been elected speaker of the German parliament's lower house, while the Greens, potential coalition allies of Germany's Christian Democrats, will demand higher budget spending.
About 40 percent of those who replied to a special question on whether a new finance minister would loosen German fiscal policy, replied in the affirmative. "Fiscal policy stances are being loosened in many regions and Germany looks set to follow suit. Likely coalition partners for Merkel will push for looser policy and this is aided by the removal of Schaeuble as finance minister," Hatheway added.
The allocation to UK shares rose one percentage point to 24.7 percent, the highest since January. But this possibly reflects the market's exposure to the world economy, rather than to domestic finances which are under strain from Britain's decision to exit the European Union. Ratings agencies have stripped Britain of its gold-plated AAA score and warn that the absence of a clear British position and the lack of time before its scheduled March 2019 exit date make a "hard Brexit" more likely - crashing out of the EU without a trade deal in place.
Two-thirds of fund managers, in response to a special question, said the current impasse in talks with the EU made a hard Brexit more likely. "The clock is ticking down and the negotiation process looks to be deadlocked. A lack of exit deal would lead to greater unknowns for businesses," said Oliver Blackbourn, multi-asset analyst at Janus Henderson Investors.