LONDON European investors' exposure to British stocks fell to two-year lows in September, while euro zone holdings slipped to the lowest since last May due to continued uncertainty over the economic fallout from Brexit.
Reuters monthly asset allocation poll of 16 fund managers and chief investment officers, carried out between Sept. 15 and 28, showed investors cut UK allocations to 5.8 percent of equity portfolios, the lowest since October 2014.
That is down from a 7 percent holding before the June 23 referendum in which Britons voted to leave the European Union.
With negotiations yet to start and no clear roadmap for Brexit, concerns have grown that Britain and mainland Europe risk falling into recession due to the prolonged uncertainty around investment, trade and migration.
"Brexit represents an important shock to the outlook, with further implications expected in the months to come," said Matteo Germano, global head of multi asset investments at Pioneer Investments.
Within their fixed income portfolios too, European investors cut UK holdings by almost 1 percentage point to 1.8 percent, the lowest level in at least five years.
Although the impact on the British economy has been fairly limited to date, with the labour market and retail sales holding up well, Germano said the consequences of the vote would gradually materialise. Brexit is likely to act as a drag on European growth, too, he said, especially in 2017.,
Given this outlook, fund managers also cut exposure to euro zone equities by over 2 percentage points to 31.5 percent, the lowest since May 2015.
The cuts came despite an increase in the overall equity allocation within investors' global balanced portfolios, to 42.7 percent, the highest level since May.
Within equity portfolios, investors favoured U.S. stocks, boosting holdings by 3.6 percentage points to 41.1 percent, the highest level since October 2014.
The U.S. Federal Reserve held off raising interest rates at its September meeting, helping the Nasdaq .IXIC to a record intraday high in the wake of the decision.
European investors also added to Japanese equity holdings, which rose to 6.2 percent from 5.8 percent in August.
At its September meeting, the Bank of Japan left open the possibility it would maintain its ultra-loose policy longer than expected, saying it would allow inflation to overshoot its 2 percent target before tapering asset purchases.
"Global central banks, first and foremost the Bank of Japan, made it clear that they are still committed to their purchase programmes and are willing to support the market for longer," said Jan Bopp, asset allocation strategist at Bank J Safra Sarasin.
As a result, 90 percent of poll participants did not see a further sell off in G3 bonds this year, following a rout earlier in the month. The shake out was driven by worries that the post-2008 era of super-charged central bank stimulus was coming to an end.
Investors did show some signs of caution, however, trimming overall bond holdings to 41.6 percent, the lowest level since June. Within global fixed income portfolios, U.S. bond holdings fell to 26.3 percent, the lowest since February.
Europe poll story (EUR/ASSET)
U.S. poll story (US/ASSET)
UK poll story (GB/ASSET)
Japan poll story (JP/ASSET)
China poll story (CN/ASSET)
(Additional reporting by Maria Pia Quaglia Regondi; Editing by Catherine Evans)