By Sujata Rao
British funds cut their equity allocations to four-month lows following an early February shakeout, though many remain optimistic that strong economic growth and company earnings will keep the stock market boom going.
Reuters’ latest monthly asset allocation poll of 15 investment managers was conducted between February 12 to 26, as markets were recovering some poise following a savage sell-off that took US stocks 10% lower in the space of less than a week and sent equity volatility to multi-year highs.
World stocks are set to end February in the red, the first loss-making month after a 15-month winning streak, as central banks’ policy tightening intentions and rising inflation drove bond yields to multi-year highs.
UK-based fund managers cut their overall equity holdings by more than 2.5 percentage points to 51.2% on average, raising cash by one percentage point to 5.6%.
The swing followed a 7.5 percentage point surge in equity allocations to record highs over the course of 2017.
US and British stocks were especially out of favour, with allocations falling around four percentage points, leaving the latter at its lowest since November.
Meanwhile, eurozone and emerging equity holdings went up by 2.5 and four percentage points respectively.
“The waiting is over and the expected correction has blown at least some of the froth off the equity markets,” said John Husselbee, head of multi-asset at Liontrust Investments. But like many of his peers, Mr Husselbee was reluctant to call the end of the equity bull run, citing an expanding world economy, strongly growing company earnings and US tax cuts.
Asked if world stocks were already past their cyclical peak, 90% of those who responded said no.
That was despite expectations that US bond yields would rise further. Some 70% of those who replied to a question on 10-year yields predicted they would end 2018 above 3%, compared to current levels around 2.9%.
Kamil Amin, investment strategist at Charles Stanley, was among those confident that equities would test new highs. “The opportunity cost for holding equities over bonds in the US will remain firmly in place,” he said.