LONDON (Reuters) - Strong company earnings and the revival of U.S. tax reform expectations encouraged European fund managers to boost equity holdings to nine-month highs in October, a Reuters poll showed on Tuesday.
The survey of 19 chief investment offices and wealth managers was carried out between Oct. 16-27, a period in which U.S. tax cut plans passed a key legislative hurdle, reviving expectations that corporate America would reap the benefits.
In the poll, investors raised their U.S. stocks allocation to 37.2 percent of global equity portfolios, the highest level since April.
Overall equity allocations rose by 2 percentage points to 46.1 percent of global portfolios, the highest since January, while cash was cut to 6.7 percent, a four-month low.
U.S. stocks hit record highs in October, lifted by better-than-expected company earnings and upbeat third quarter U.S. GDP data. The Nasdaq looks set to end the month up over 3 percent .IXIC, whilst the Dow Jones is up 4.2 percent .DJI.
Boris Willems, a strategist at UBS Asset Management, said U.S. equities looked fully valued relative to history, but valuations were not so stretched as to rule out further upside.
“Supported by continued earnings growth and the prospect of a more stable economic backdrop, we believe equity valuations have scope to expand further,” Willems said.
Investors also raised Japanese equity holdings by 2.1 percentage points to 10.2 percent, the highest since May 2015.
The Nikkei .N225 posted its longest daily winning streak in over 50 years in October, advancing more than 5 percent over 14 days ahead of a general election. It is set to end the month up around 8 percent.
Antoinette Valraud, head of third party portfolio management at Generali Investments, said Japanese markets should benefit from the improving economy and favourable politics.
Japanese Prime Minister Shinzo Abe is expected to order his cabinet to compile an extra budget by year-end to give impetus to his economic agenda after his ruling bloc’s strong election win.
On the debt side, investors cut their eurozone bond holdings by 4.3 percentage points to 50.9 percent, the lowest since August 2016, and their U.S. bond allocation by 2.6 percentage points to 18.5 percent, the lowest since March 2015.
The U.S. Federal Reserve will likely raise rates again this year, while the European Central Bank (ECB) pledged on Oct. 26 to halve its bond purchases from January. However, it extended the programme until the end of next September.
Uncertainty over ECB policy, and the Bank of England’s (BoE) dilemma as it struggles to balance sluggish growth with inflation, meant just 41 percent of poll participants who answered a question on the Fed, ECB and BoE thought all three would be tightening monetary policy by year-end.
Robeco strategist Peter van der Welle said BoE Governor Mark Carney was “really caught between a rock and a hard place”.
“From the viewpoint of credibility, a rate hike after the recent hawkish rhetoric would be justified, but the economic reality of a vulnerable household sector and cooling housing market suggests the BoE must hold the trigger,” he said.
Poll participants were similarly split on whether a new German finance minister would loosen the country’s fiscal policy, with only 50 percent expecting this.
Last month Wolfgang Schaeuble stepped aside as finance minister, clearing the way for another party to take the job as part of negotiations to forge a new coalition government.
“We expect that (German Chancellor Angela) Merkel will have to accept some looser fiscal policy to build the coalition,” said Francois Savary, chief investment officer at Prime Partners.
But he expects Merkel to point towards German inflation data as a reason to ensure such loosening is limited.
Reporting by Claire Milhench and Maria Pia Quaglia Regondi