LONDON (Reuters) - European funds cut their U.S. debt holdings in June but continued to add to U.S. stocks, taking the view that the world’s number one economy and stock market is in good enough shape to stomach another rate rise.
Reuters’ latest monthly survey of 16 European asset managers, held between June 15-28, showed equity holdings at 44.3 percent of global balanced portfolios as the first half of 2017 drew to a close, down 2 percentage points from January.
Bond allocations were steady on May at 40.5 percent, but up from January’s 38.7 percent.
Fund managers cut cash levels, however, to just 6.7 percent, a six-month low, testifying to a still-buoyant appetite for risk.
The June poll came just after the U.S. Federal Reserve raised interest rates for the fourth time in this cycle to 1.0-1.25 percent, and set out plans to start cutting its $4.5 billion portfolio.
The move showed the Fed’s willingness to look past a run of soft inflation data, while its policymakers have signalled their determination to move ahead with policy tightening. That has driven the U.S. bond yield curve to its flattest in a decade.
Reuters poll participants cut their U.S. bond exposure by four percentage points to 20.2 percent of their fixed income portfolios, the lowest since January.
But their appetite for U.S. stocks was undented, up at 36.9 percent of global equity portfolios, despite concerns over valuations and a mid-month sell-off in tech shares.
That rout saw the combined market cap of the five biggest U.S. tech firms drop by $120 billion in less than a week and sparked fears of a global equity market reversal.
But asked if tech shares were overvalued, 70 percent of the poll participants who responded disagreed, seeing few parallels to the dotcom bubble that burst in 2001.
“One could point to the fact that technology stocks are 40 percent more expensive compared to the broader market from a historical perspective,” Robeco strategist Peter van der Welle said. “But in the absence of a potent threat to their strong business models and significant pricing power, they seem expensive for a reason, limiting correction risk.”
Van der Welle also thought the U.S. economy was robust enough to weather more rate rises, adding: “U.S. economic growth is likely neither too hot nor too cold. None of the usual suspects that trigger a recession are at play. The upward sloping yield curve suggests the Fed can go ahead without immediately bringing the economy on its knees.”
More than two-thirds of those who replied to a question on Fed tightening believe the U.S. economy will be able to take another rate rise this year.
Among those who disagreed was Raphael Gallardo, a strategist at Natixis Asset Management.
“The U.S economy is not strong enough: the housing market is wobbly, credit to enterprises is stalling, corporate profitability is falling and access to credit for consumers is tightening,” he said.
The other major event of June was the UK election which delivered a serious reversal for the ruling Conservative Party, weakening the position of Prime Minister Theresa May, as well as her hand in Brexit negotiations with the European Union.
More than three-quarters of respondents thought the election had increased the chances of a “soft” Brexit, allowing Britain to maintain some formal trade relations with the EU.
Accordingly, investors raised their UK equity allocation to 7.2 percent, the highest since February. They reduced euro zone equities by 2 percentage points to 32.2 percent, while raising euro zone bond holdings to 56 percent, the highest since April.
However, UBS Asset Management strategist Boris Willems was still bullish on European stocks.
“Initially supported by the ECB’s loose policy and a weak euro, with bank balance sheet restructuring now largely over, we see the recovery as increasingly self-sustaining,” he said.
The poll did not appear affected by comments on June 27 from European Central Bank chief Mario Draghi who highlighted the euro zone recovery and opened the door to tighter monetary policy. His comments sent the euro to one-year highs, fuelled a German Bund sell off and sent stocks to two-month lows .
Additional reporting by Maria Pia Quaglia Regondi; Editing by Gareth Jones