European funds cut UK equity, opt for emerging markets - poll

By Karin Strohecker

LONDON (Reuters) - European fund managers have trimmed their holdings of UK stocks to the lowest in nearly two years but raised exposure to emerging market bonds and equities in their search for higher yields, the latest Reuters asset allocation poll shows.

The survey of 17 fund managers and chief investment officers, carried out between Aug. 16 and 30, showed investors kept overall equity holdings at 41.3 percent but increased cash allocations to 6.8 percent. That was largely at the expense of fixed income, holdings of which fell to 42.8 percent from 43.2 percent in the previous month.

Investors have become increasingly stumped by low or negative yields offered by developed bond markets which means they effectively pay for the privilege of lending to governments.

Yields hit record lows after Britain voted in June to leave the European Union, compounding the pain after years of monetary easing, with more than $11 trillion (8.37 trillion pounds) in sovereign debt offering negative yields, according to credit rating firms.

"Markets will continue to be sensitive to new economic data and investor sentiment remains fragile," said Boris Willems, strategist at UBS Asset Management.

"Political risk is likely to be one of the biggest drivers of volatility, with the U.S. presidential elections coming up later this year and the Brexit vote creating vast uncertainty and economic implications for Britain, the EU and beyond."

Investors decreased their holdings of British stocks to 6.6 percent, the lowest level since October 2014, the poll showed, while allocations to euro zone peers fell to 33.7 percent from 35.6 percent across their equity portfolios.

While exposure to U.S. stocks recovered to 37.5 percent from the previous month's dip, exposure to companies listed in emerging Europe, Asia ex-Japan and Latin America all increased.

"In this phase, emerging markets can offer better opportunities than developed markets both in fixed income and equities," said Matteo Germano, Global Head of Multi Asset Investments at Pioneer.

"The earnings upward revision with a stabilization of economic conditions could support emerging market equity markets in the next few months."

MSCI's emerging market index has soared 13 percent since the start of the year after three years in the red and dedicated funds have enjoyed several weeks of solid inflows as many investors are calling a turnaround.

This compares to an increase of less than 5 percent in the MSCI All Country World Index since the start of the year.

Exposure to Japanese stocks nudged higher to 5.8 percent from 5.6 percent as investors expected more stimulus from Tokyo.

Continued fiscal and monetary support from Japan's policymakers also convinced investors to pile into the country's debt, with exposure across bond portfolios nearly doubling to 2.6 percent in August. Exposure to euro zone debt rose to 49.3 percent, bouncing back from last month's dip of 45.8 percent.

"For the time being we remain positive in European credit because of ECB action even with very low yields, but we are more and more biased to diversify our bond positioning towards other debt markets," said Pierre Radot, portfolio manager at Natixis Asset Management.

Central bank buying has supported sovereign bond prices in Europe and Japan over the past months even though growth remains weak.

The gains in Japan and the euro zone came at the expense of U.S. fixed income, which saw its share fall to 27.2 percent, the lowest since April.

Meanwhile investors nudged up their exposure to emerging countries in Asia and Europe, which rose to 2.6 percent from 1.7 percent and 2.3 percent from 2.1 percent respectively.

(Editing by Catherine Evans)