By Chris Vellacott
LONDON (Reuters) - European investors set up their portfolios to withstand a rise in market volatility in November, building up holdings of safe- haven cash while cutting back on riskier shares, a Reuters poll shows.
According to a monthly poll of 16 Europe-based asset managers, the average recommended allocation for cash rose by 60 basis points since October, to 8.6 percent. Exposure to stocks, which are higher risk, was cut to 47.1 percent on average from 47.7 percent a month earlier.
Investors blamed a mounting risk of deflation in Europe or even Japan-style deflation, which constrains spending and can keep growth low for years. They also cited geopolitical tension related to Russia and the Middle East.
"We believe that some hedging for risk assets is still justified, to protect as much as possible against spikes of volatility. Stretched valuations and more central bank-addicted financial markets could be highly vulnerable to geopolitical risks and, in general, to increased volatility of macroeconomic data," said Monica Defend, Global Head of Asset Allocation Research at Pioneer Investments.
Allocations to bonds in global balanced portfolios also eased, to an average 35.9 percent from 36.2 percent. Property exposure rose 10 basis points to 0.8 percent.
Exposure to alternatives - such as hedge funds, which can thrive in volatile markets because fund managers can bet on prices falling as well as rising - rose 30 basis points to 7.7 percent.
The survey was carried out from Nov. 14-27, as central banks in Europe, Japan and China boosted stimulus to combat slow growth and tensions grew between Russia and the West over Ukraine.
Prominent in the minds of European investors are low growth and disinflation in their home market. Allocations to the euro zone fell in both equity and bond portfolios, the survey showed.
The average exposure to the euro zone in global equity portfolios dropped to 28.9 percent from 29.7 percent. Exposure in global bond portfolios fell more, to 53.5 percent from 57.3 percent.
"Europe's two challenges are a liquidity issue and a structural issue. The ECB is helping on the liquidity side, but there are limits to what it can do and structural reforms are still needed," UBS said in comments submitted to the survey.
For a table showing poll results for the European leg of the Reuters global asset allocation survey, click on:
(Reporting by Chris Vellacott; Editing by Larry King)