Funds turn slightly more bullish, buy more stocks

LONDON Thu Aug 30, 2012 12:04pm BST

LONDON (Reuters) - Global investors, most of whom do not expect more monetary stimulus from the U.S. Federal reserve this year, edged towards more risky assets in August, encouraged by ECB plans to tackle the euro zone crisis and signs of improvement in the U.S. economy, a Reuters poll showed on Thursday.

Investors trimmed their cash and government securities allocations and bought more stocks and corporate bonds, the monthly survey of 59 leading investment houses in the United States, continental Europe, Britain and Japan showed.

"Equities look very appealing when compared with government bonds - with an extremely high risk premium," said Dirk Wiedmann, Head of Investment at Rothschild Wealth Management.

But despite reaching a four-month high of 49.5 percent of portfolios, equity holdings remain near their lowest level since the global poll data was first compiled in January 2010, and allocations to safe-haven cash are still close to record highs, with wary investors warning of risks ahead in September.

"The uncertainty surrounding the next steps in the euro zone is running at a fever pitch," said Alan Gayle, senior investment strategist at U.S-based Ridgeworth Investments. "A lot of investors feel that we're at a very tense period in the negotiations, and they would prefer to wait on the sidelines."

The survey showed that the reaction to European Central Bank chief Mario Draghi's pledge to do whatever it takes to save the euro was mixed, with many waiting to hear more about the heated debate on bond-buying plans from the central bank's September 6 policy meeting.

While an overwhelming 95 percent of fund managers believe that the ECB will buy Spanish or Italian bonds by the end of the year, just over half said that Draghi's announcements did not change their view of the euro zone crisis.

In particular, Draghi failed to convince most investors to buy more euro zone bonds, with a sharp drop in allocations in the United States pushing global holdings of the bloc's government securities to the lowest in at least two years, despite more buying by fund managers based in the euro zone and Japan.

Euro zone equities recovered some of their losses, however, with allocations increasing by one percentage point to account for 15.1 percent of stock portfolios.

Meanwhile investors moved out of government debt into investment grade corporate bonds which were at their highest in over two years in October, while government securities hit their lowest level in the same time frame.

Following improvement in indicators including retail sales and signs of recovery in the housing market, the poll showed a sharp change in expectations about the U.S. Federal Reserve's future plans to stimulate the economy.

Ahead of Fed Chairman Ben Bernanke's speech at Jackson Hole, Wyoming on Friday, only 44 percent of investors expect the central bank to embark on a third round of bond purchases, or quantitative easing, by end-2012, down from 70 percent in the same poll last month.

"The Presidential elections are coming up in November and any move may not be recommended until the January inauguration," said Monica Defend, head of global asset allocation, at Italy-based Pioneer.

REGIONALLY

Japan asset managers took a quite different view from investors in the United States and Europe, increasing bond allocations to a record high while cutting stock holdings to a 14-year low in August, over worries over growth and the euro zone crisis.

"There is likely to be confusion again when Europeans discuss their safety net. The rebound in Spanish bond prices since late July has created comfort in financial markets, but there is a risk that market sentiment has become too optimistic," said Akio Yoshino, chief economist at Amundi Japan.

In contrast, euro zone investors were very much encouraged by ECB plans, with 12 out of 17 saying that Draghi's comments about bond buying and plans to limit euro zone spreads had changed their view of the crisis. In turn, they have bought more euro zone bonds, taking the allocation to the highest since March.

British investors have, like their peers in the rest of Europe, bought more euro zone equities, but trimmed the bloc's government bonds, preferring to turn to more U.S. bonds.

U.S. fund managers took a more bullish tone this month, increasing their stake in investment-grade corporate bonds and stocks in August, while reducing their exposure to higher yielding "junk" bonds.

"A number of fixed income investors want the added yield of corporate bonds, but they are also seeking safety," said Alan Gayle, senior investment strategist at Ridgeworth Investments, with regards to shift away from junk bonds to corporates.

For Europe poll, click on <EUR/ASSET>

For U.S. poll, click on <US/ASSET>

For UK poll table, click on <GB/ASSET>

For Japan poll, click on <JP/ASSET>

(Additional reporting by Chris Vellacott, Sujata Rao and Carolyn Cohn in London, Maria Pia Quaglia in Milan, Sam Forgione in New York, Hideyuki Sano in Tokyo and Rahul Karunakar, Namrata Anchan and Aakanksha Bhat in Bangalore; Graphic by Scott Barber; Editing by Toby Chopra)