LONDON British fund managers have raised their allocations to eurozone equities to the highest level since August 2016 after an emphatic French election win for centrist Emmanuel Macron pushed back the threat of a European Union break-up.
Macron was elected French president on May 7, defeating his far-right rival Marine Le Pen who had threatened to take France out of the EU and the euro.
This triggered a relief rally in European equities, which look set to end May with their fourth straight month of gains . A Reuters poll of 15 UK-based wealth managers and chief investment officers, conducted between May 15 and 25, found investors almost unanimously bullish on European stocks.
"Political risk in 2017 has all but gone, with the German election in October appearing to be a foregone conclusion, so allied with the recovery being seen in the real Eurozone economy this is surely positive for European equities," said Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald.
Within their global equity portfolios, fund managers raised their eurozone exposure by one percentage point to 16.1 percent, whilst trimming U.S. allocations from 31.3 percent to 30.1 percent, the lowest level since August 2016.
Poll participants who answered a special question on whether there was further upside for European equities were unanimous in their agreement.
"There is significant potential for catch up relative to the U.S. due to compelling valuations, a rebound in European economic growth that we think is sustainable, and resurgent corporate earnings," said David Vickers, senior portfolio manager at Russell Investments.
Even managers who were sceptical about the short-term outlook for European equities, given the magnitude of their recent outperformance, were optimistic about the medium term.
"The European business cycle tends to lag the U.S. cycle by about six months and economic data in Europe is likely to look relatively good for a while," said Trevor Greetham, head of multi-asset at Royal London Asset Management.
Overall, investors raised equities to 49.1 percent of their global balanced portfolios, the highest since January 2016.
Greetham predicted monetary policy would remain loose, noting there was little sign of the surge in wages that marks the beginning of the end of an expansion.
Investors were more cautious on UK stocks and bonds in the run-up to a snap general election called for June 8. UK stocks were cut to 23.7 percent of global equity portfolios, and UK bonds fell to 26.7 percent of global bond portfolios, from 29.5 percent in April.
About two-thirds of those who answered a special question on sterling thought the pound would rise if the Conservative party won with an increased majority as this would likely strengthen Prime Minister Theresa May's hand in the Brexit negotiations.
Sterling GBP=D3 hit an eight-month high in mid-May, having gained 3 percent against the dollar in April after the snap election was announced. That left some wondering if the rally had much further to run.
Ken Dickson, investment director at Standard Life Investments, expected sterling to rise if the Conservatives increase their majority but added that "the reaction will be modest as the market already expects an improvement in the governing party's working majority".
He also warned there might not be a linear relationship between the size of the majority and any subsequent rally in sterling: "Backbenchers tend to be more 'misbehaved' when governments have super-large majorities."
Webster-Smith of Brooks Macdonald sees upcoming Brexit negotiations as key, arguing that a quick agreement over the 'exit fee' being demanded of the UK would bode well for a trade agreement with the EU and subsequently for sterling.
But he added: "The EU have promised full transparency in the talks which could enhance sterling volatility depending on the news being positive or negative."
(Editing by Mark Trevelyan)