LONDON (Reuters) - British investors cut their equity holdings to three-month lows in June and reduced their emerging-market exposure as the U.S. turned up the heat on its simmering trade war, but fund managers still expect world stocks to end the year higher.
Reuters’ monthly asset-allocation poll of 17 UK-based asset managers was conducted June 18-27 as the U.S. government escalated a trade dispute with its key trading partners, sending global equities into a tailspin.
Tit-for-tat tariffs by the United States and China and threats by U.S. Treasury Secretary Steven Mnuchin to extend restrictions on investment in U.S. tech firms to “all countries that are trying to steal our technology” prompted investors to dial back exposure to risky assets in June.
Poll participants cut their global equity holdings to 51.8 percent, the lowest since March and down almost 2 percentage points since January Exposure to alternatives such as commodities increased to 13.6 percent.
Mouhammed Choukeir, chief investment officer at Kleinwort Hambros, was one of those adding to alternatives, saying uncorrelated sources of returns such as hedge funds could improve diversification.
“Talk of trade wars, Italy’s eurosceptic coalition, tightening dollar financial conditions and the turmoil buffeting Argentina and Turkey all suggest caution,” he said.
The Turkish lira TRY= and Argentine peso ARS= came under sustained selling pressure in May, and while their central banks have hiked rates, the currencies are still down around 17.5 percent and 32 percent respectively year-to-date.
Emerging market stocks .MSCIEF bore the brunt of the selling in June, down almost 5 percent and extending year-to-date losses to 8 percent.
Investors fear a step up in U.S. tariffs on China and Europe will hinder Asian manufacturers and others involved in the supply chain and crimp global growth.
“The big question is ‘when will the rout end?’,” said Justin Onuekwusi, a fund manager at Legal & General Investment Management. “The White House is doubling down on its tariff threats on an almost daily basis.”
In the poll, investors cut their emerging equity exposure by 2.5 percentage points to 18.4 percent in June. Emerging debt, which is down some 5 percent year-to-date, was cut by 4.5 percentage points to 18.1 percent.
Poll participants who answered a question on the U.S. dollar’s surge against emerging-market currencies were almost evenly split over whether this had further to run. The dollar index .DXY spiked to 11-month highs in June.
However, Christopher Peel, chief investment officer at Tavistock Wealth, said emerging equities and local currency debt were cheap compared with developed markets, and buyers were likely to return over the summer months.
“Also, the ballooning U.S. budget deficit will begin to put downward pressure on the U.S. dollar, which is consistent with past periods of fiscal indiscipline,” he said.
Poll participants who answered a question on the outlook for global equities were unanimous in expecting the MSCI all-country world index .MIWO00000PUS to end the year higher.
The index is currently flat year-to-date, but Andrew Milligan, head of global strategy at Aberdeen Standard Investments, said he expected the second half of 2018 to mirror the first, with stocks making “erratic upward progress”.
Thomas McDonald, portfolio manager at Russell Investments, agreed: “While numerous geopolitical headlines have caused episodic volatility, to date this hasn’t really compromised the fundamental story which remains supported by strong economic growth in the U.S. and earnings growth that is almost off the charts,” he said.
Reporting by Claire Milhench, edting by Larry King