By Sujata Rao
LONDON (Reuters) - British funds have 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 Feb. 12-26, as markets were recovering some poise following a savage sell-off that took U.S. stocks 10 percent 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 (MIWD00000PUS), 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 percent on average, raising cash by one percentage point to 5.6 percent.
The swing followed a 7.5 percentage point surge in equity allocations to record highs over the course of 2017.
U.S. and British stocks were especially out of favour, with allocations falling around four percentage points, leaving the latter at its lowest since November. Meanwhile euro zone 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, Husselbee was reluctant to call the end of the equity bull run, citing an expanding world economy, strongly growing company earnings and U.S. tax cuts.
Asked if world stocks were already past their cyclical peak, 90 percent of those who responded said no.
That was despite expectations that U.S. bond yields would rise further. Some 70 percent of those who replied to a question on 10-year yields predicted they would end 2018 above 3 percent, compared to current levels around 2.9 percent.
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 United States will remain firmly in place," he said.
Bond allocations rose slightly to 26.2 percent, though they remain four percentage points below year-ago levels.
However, while investors cut holdings of U.S., European and Japanese debt, they sharply raised emerging bond allocations, possibly reflecting the view that the higher yields they offer provide a cushion against higher global inflation.
They also raised holdings of alternative assets, a category that includes commodities and hedge funds, to 14.3 percent, the highest since September 2016, the poll showed.
As for the VIX equity volatility gauge, which surged to multi-year highs of 50 percent during the sell-off from less than 10 percent, investors were spilt equally on whether it would end 2018 above or below 20 percent (VIX).
"We expect bouts of volatility to recur periodically this year as stock markets find themselves in a tug of war between good news on the corporate earnings front and bad news in terms of U.S. rate hikes," said Trevor Greetham, head of multi-asset at Royal London Asset Management.
While Greetham saw volatility likely ending 2018 below 20, he reckoned "it is unlikely to spend much time around the lows we saw in 2017".