December 22, 2017 / 12:03 PM / 3 months ago

UK investors stick with stocks at end of bumper year

LONDON (Reuters) - Having enjoyed stellar equity returns in 2017, UK investors lifted their stock allocations even further in December, a Reuters poll showed, though some cited political risk as a reason to cut exposure to European and British markets.

The Reuters monthly survey of UK-based investors showed equity allocations in global portfolios at 53 percent, the highest in three months and 7.5 percentage points above levels at the end of 2016.

Funds particularly favoured U.S. stocks, raising allocations to almost 30 percent of equity portfolios, citing among other reasons President Donald Trump’s tax cut package passed this week. Wall Street hit successive record highs ahead of the bill’s passage, delivering returns of around 20 percent in 2017.

“Our base case remains that the first half of 2018 will see a continuation of the current low growth and low inflation backdrop which should be supportive of equities,” said Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald.

European equities too did well this year, with gains of over 11 percent , thanks to a steady economic recovery and eurosceptic parties’ failure to make headway in national elections throughout 2017.

Italian elections in early 2018 are not expected to disrupt this, but some were cautious. Most saw Britain’s economic weakness amid the Brexit process as a bigger risk, cutting UK equity holdings to the lowest level since August 2015 at 21.7 percent.

Larry Hatheway, group head of investment solutions at GAM, said he was looking to add to UK Gilts, betting on the British economy to underperform peers.

Others such as John Husselbee, head of multi-asset at Liontrust, noted that fears of political turmoil stemming from Europe’s hectic 2017 election cycle had proved to be misplaced.

That caution had seen euro zone allocations cut at the end of 2016 to 13.4 percent of equity portfolios, a two-year low. They now stand at 16.7 percent, slipping half a point from November levels.

Europe was the obvious candidate for near-term volatility due to looming Italian elections, Husselbee said. But he added: “As 2017 has proved, does it really matter? The bad news on both political and geopolitical this year hasn’t stalled the bull market.”

Inflation meanwhile continues to prey on investors’ minds even though policymakers’ predictions on price growth have consistently been proved wrong, dampening bond yields and keeping equity markets rallying.

Currently, the European Central Bank (ECB) predicts inflation in the bloc at 1.7 percent in 2020 - close to its target - and the Fed expects to hit its 2 percent target in 2019.

Only a third of those replying to a question on when the ECB would halt asset purchases expect this to happen in 2018; some said it would not happen until late in 2019 or even beyond.

In response to a question on U.S. interest rates, only a fifth who answered predicted three or more hikes in 2018, while the majority agreed with market expectations of two moves.

Andrew Milligan, head of global strategy at Aberdeen Standard Investments, was in the hawkish camp. Three Fed rate rises is his base case for 2018 but he sees four moves as a possibility.

“The effects of the U.S. tax cuts, both directly on the economy and indirectly via the currency, and the ability of U.S companies to keep wage costs contained via productivity improvements, will be key swing factors,” he said.

Additional reporting by Claire Milhench; Editing by Hugh Lawson

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