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LONDON (Reuters) - British investment funds picked up more equities in December on expectations that increased spending by some governments would drive an acceleration in economic growth, benefiting everything from banks to construction firms.
Reuters' monthly survey of 13 UK-based investors, carried out from Dec. 15 to 21, showed funds increased their equity holdings to 45.4 percent, up one percentage point from November, and trimmed their cash positions to 7.5 percent from 9.6 percent.
U.S. President-elect Donald Trump's plans to cut taxes and boost spending have pushed Wall Street to record highs, with financials, energy, materials and infrastructure plays all expected to benefit.
"Equities are attractive in absolute terms, with reasonable valuations and positive momentum," said Mouhammed Choukeir, chief investment officer at Kleinwort Hambros. "They also remain attractive compared to the other core asset classes. As such, we continue to be 'risk on'."
Within their global equity portfolios, asset managers added to their U.S. as well as UK holdings, raising the former by two percentage points to 32.8 percent and the latter by one percentage point to 25.4 percent.
Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), remains moderately overweight stocks, which tend to beat bonds when global growth is picking up.
He expects this trend to continue but added: "With our investor sentiment indicator at euphoric levels, we are not chasing the rally."
Peter Lowman, chief investment officer of Investment Quorum, said that whilst equities in many parts of the world were not cheap, they were still better value than bonds.
"Therefore, any worthy pullback could be greeted by a wall of money that could exit from bonds and cash that is currently sitting on the side lines," he argued.
Although a "great rotation' out of bonds and into equities should gather pace in 2017 as investors reposition portfolios for a more inflationary environment, British asset managers continued to commit new money to fixed income in December.
In fact, they raised their bond allocations to 31.7 percent, the highest level in at least five years, even though rising inflation erodes the value of fixed interest assets.
One possible explanation for this is that managers were adding to index-linked bonds, such as UK linkers or U.S. TIPS. These offer some protection against rising inflation, unlike regular bonds, which pay a fixed coupon. UK inflation rose to its highest in over two years in November.
In the poll, the 'other credit' bucket, which can include linkers and floating rate notes, rose two percentage points to 11.4 percent in December, whilst investment-grade and high-yield credit were trimmed.
Those managers who answered a special question on sterling were almost evenly split as to whether the worst was over. The pound has plunged 16 percent against the dollar year-to-date, clobbered by the vote to leave the European Union.
The outlook for the pound will likely hinge on what shape 'Brexit' will take.
Ryan Boothroyd, an analyst in the multi-asset team at Henderson Global Investors, said he was positive on sterling in the short-term as the government seemed likely to favor a 'soft' Brexit, where Britain keeps in or close to the EU single market, retaining many of the trade benefits it had as a member.
However, fund managers said the pound could come under more pressure if a 'hard' Brexit looked more likely - one in which Britain leaves the EU's single market in order to impose controls on immigration.
Given Europe's packed political calendar for 2017, managers saw opportunities for stock-pickers, who had to be ready to take advantage of dislocations.
"Be ready to buy dips," RLAM's Greetham said, noting that the surge in populism that had dominated the political and economic landscape in 2016 would continue to exert an "erratic influence" in 2017, prompting a rise in volatility.
"But it would make sense to trim exposure when things appear too good to be true," he warned.
Editing by Hugh Lawson