By Claire Milhench
European investors have slashed holdings of British stocks to the lowest in 17 months, with many citing major fallout risks attached to a possible UK exit from the European Union as the main reason for their caution.
Wary asset managers based in continental Europe also sharply raised the bond exposure in their global portfolios to the highest in more than 4-1/2-years, according to the latest monthly Reuters survey of 15 fund managers and chief investment officers conducted between May 16 and May 25.
Phone and online polls of voter intentions in the UK’s June 23 referendum on membership of the European Union continue to paint a differing picture of the outcome, while a significant chunk of voters are undecided.
Perhaps not surprisingly then, investors cut their exposure to UK stocks to just 7 percent of their global equity portfolios in May, the lowest level since December 2014.
They also trimmed UK bond holdings to 2.7 percent, the lowest since February, the poll showed.
“Right now a Brexit is the biggest tail risk in the world,” Jan Bopp, asset allocation strategist at Bank J Safra Sarasin, said, predicting it would likely throw the UK into recession in the second half of 2016 and trigger a repricing of risk in other markets.
Eight out of nine poll participants who responded to a specific question on Brexit thought European equity markets and the euro would also be hit by a victory for the ‘Leave’ camp, as it would create a precedent for other countries to quit.
“Brexit would be opening up a Pandora’s box in EU politics, by bolstering anti-EU forces throughout the continent,” said Raphael Gallardo, a strategist at Natixis Asset Management.
Reflecting this worry about the wider impact of Brexit, investors slashed euro zone equity holdings by over 2 percentage points to 34.9 percent, while eurozone bond allocations slipped to 50.8 percent, the lowest since December 2015.
In their global balanced portfolios, investors raised their bond holdings by 1.8 percentage points to 41.6 percent – the highest allocation since August 2011.
At the same time, their allocation to equities remained at 43 percent, the lowest level since July 2012.
Giordano Lombardo, chief executive at Pioneer Investments, said the recent repricing of the probability of a June Fed rate hike had slightly penalised risk assets and pushed government yields higher.
“We don’t see many catalysts for further sustained rallies of risk assets in this phase,” he added.
All 10 of the European poll respondents who expressed a view thought the Fed would raise rates in 2016, after standing pat since December.
Nadege Dufosse, head of asset allocation at Candriam, expected two hikes, in July or September, and December.
Gallardo at Natixis thought the Fed could raise rates in July to maintain the credibility of its rosy economic scenario, but argued that a slowdown in domestic demand and a tightening of financial conditions was already baked in.
“So our scenario is that, should the Fed hike by mid-year, it will want to stay put around the elections in the autumn, only to find out that the U.S. economy is seriously slowing come Q4” he said.
SOURCE: Reuters
