LONDON (Reuters) - British investment managers sharply increased their exposure to stocks in January as concerns of more financial instability receded and the market's recovery gathered pace, a Reuters poll showed on Thursday.
A monthly survey of fund managers and chief investment officers in the UK found the average allocation to equities in balanced portfolios jumped two percentage points in January to 54.3 percent.
That marks the highest allocation to stocks by UK investors since last March and comes mainly at the expense of bond holdings, which dropped to 26.7 from 28.2 percent a month earlier.
"Equities remain our favoured asset class and we certainly prefer them to bonds which we see as dangerously overvalued," said Robert Pemberton, investment director at HFM Columbus Group.
The average allocation to cash, commonly used as a safe haven in times of trouble, stood at 5 percent, having fallen steadily from a peak in the middle of 2012 of more than 8 percent.
Property allocations averaged 2.5 percent and exposure to alternative assets such as commodities, hedge funds and private equity was 11.5 percent in January.
But while investors are broadly expect the stock market recovery to continue, they cautioned that the risk of setbacks remains with many of the world's economic problems still not fully resolved.
"We still believe that stock prices will make progress during 2013 but the path will probably not be smooth," said Chris Paine, director of asset allocation at Henderson Global Investors.
"Though the tail risks of last year have diminished, the on-going process of deleveraging suggests that economic growth will continue to be slow."
Risks that could destabilise markets include the still unresolved sovereign debt crisis in Europe, the possibility of an economic hard landing in China or recession in the United States.
Thomas Becket, Chief Investment Officer at Psigma Investment Management, highlighted negotiations over the U.S. debt ceiling and elections in Italy as possible causes of volatility in the coming weeks.
"Although there are plenty of signs of green shoots globally, we need to see more convincing evidence that the economy really is breaking out into a new bloom," he said.
(Editing by Susan Fenton)