LONDON European investors have cut British equity holdings to nearly seven-year lows and cut their exposure to UK bonds amid growing concern over the ramifications of Brexit and the impact of a possible Scottish secession on the economy and currency.
In contrast, participants in a Reuters monthly survey of 14 European asset managers were increasingly bullish on continental European stocks, as data signals a steady recovery in growth and authorities prepare to start unwinding ultra-easy monetary policy.
The poll was conducted between March 16 and March 30, leading up to and encompassing the formal start of Britain's exit proceedings from the European Union on March 29.
The UK economy is likely to be severely tested during the two-year long process. In the nine months since the Brexit vote, sterling has fallen 17 percent against the dollar, while Scotland has renewed its bid for an independence referendum.
"Even without any Scottish secession from the UK ... Brexit itself is uncharted territory," said Bank J Safra Sarasin asset allocation strategist Jan Bopp.
Funds cut average UK equity allocations to 4.7 percent, down 3 percentage points from February and the lowest since May 2010, the poll showed. Holdings of British bonds almost halved from February to 1.4 percent of bond portfolios, the lowest since November 2016.
Almost a third of those who replied to an extra question on the subject said they would cut exposure to the UK in the event of a Scottish secession.
"A Scottish referendum and secession would complicate significantly the internal political backdrop in the UK and would weaken the negotiating stance with EU," said Pioneer Investments' Head of Multi-Asset Investments, Matteo Germano.
While Germano warned of the risk of Brexit-related volatility spreading to Europe, he and most other investors saw euro zone equities as attractive.
European stocks are approaching a 1-1/2-year high while purchasing managers' surveys imply the bloc's economy grew by 0.6 percent in the first quarter - potentially matching the pace seen in early-2011.
Poll participants raised euro zone equity allocations to an eight-month high of 35.1 percent.
"We continue to believe that the European recovery story is, finally, gathering momentum. While geopolitical risks are clearly high ahead of major elections in a number of core euro zone countries, we see these risks as well flagged and ... already reflected in valuations," said UBS Asset Management strategist Boris Willems.
The growth picture is putting pressure on the European Central Bank to start rolling back its stimulus policy, comprising zero to negative interest rates and asset buying. More than half the fund managers expect the ECB to raise rates for the first time in 2018.
Markets have largely shrugged off this month's 25 basis point interest rate rise by the U.S. Federal Reserve, but rising inflation, a recovery in economic growth and the prospect of more policy tightening are all contributing to a general pull-back from government bonds.
While the share of bonds in global portfolios dipped a touch to 39.8 percent, government bond holdings slipped to 41.6 percent, the lowest since May 2011.
There was also some disenchantment with global equities, with their weight in global balanced portfolios falling to the lowest since November. U.S. equities were also cut by about one percentage point.
World stocks are up 6.6 percent this year but have come off record highs on concerns that U.S. President Donald Trump will not be able to implement planned tax cuts and stimulus that had spurred the rally.
Wall Street appears set for a small loss in March after four months of gains.
Robeco strategist Peter van der Welle said he was neutral on equities, noting: "We feel reluctant at this point to chase the market, especially now cracks in the Trump trade become apparent."
(Additional reporting by Claire Milhench in London and Maria Pia Quaglia Regondi in Milan; Editing by Louise Ireland)