By Claire Milhench
LONDON (Reuters) – Global investors cut their UK equity and bond exposure in August in the wake of Britain’s vote to leave the European Union and sought out higher-yielding emerging markets in reaction to Western central banks’ loose monetary policies.
The Reuters monthly poll of 46 fund managers and chief investment officers in the United States, Europe, Britain and Japan, was conducted between Aug. 16-26 and reflects global investors’ considered response to the Brexit referendum.
Immediately after the June 23 vote, sterling crashed to 31-year lows and some $2 trillion was wiped off global stock markets as investors sought out the safe haven of bonds.
In August, global investors raised their overall bond allocation to 41.3 percent, the highest in at least five years and up 3.5 percentage points from May.
But with U.S., European and emerging market stocks rebounding in August, investors also returned to equities, raising their overall allocation to 44 percent, whilst trimming their cash position to 5.8 percent, the lowest since April.
But UK assets were avoided. Within their equity portfolios, investors cut their UK exposure by one percentage point to 10.4 percent, the lowest since October 2015.
And with the Bank of England moving to insulate the economy from the Brexit fall out via a rate cut and bumper bond buying program, investors slashed their UK bond holdings from 11.1 percent to 8.5 percent, the lowest level in at least five years.,
Gilt yields fell sharply in the wake of the shock Brexit vote and poll participants saw little value for long-term investors.
“Bank of England quantitative easing has massively distorted the bond market, with the yield curve suggesting one-year rates will remain at or below 1 percent for the next 30 years,” said Trevor Greetham, head of multi-asset at Royal London Asset Management.
Boris Willems, a strategist at UBS Asset Management, noted that the lasting impact of the UK referendum result had been to spur central banks towards even easier monetary policy. This was prompting investors to seek out better returns in emerging markets, where the benchmark index <.MSCIEF> is up over 13 percent year-to-date.
“Emerging market equities have been cheap for some time,” Willems said, whilst adding a caveat that until recently there were not enough catalysts for them to overcome longer-term structural issues.
Within their equity portfolios, global investors raised their Asia ex-Japan exposure to 7.3 percent, the highest level since May 2015, and their Latin America exposure to 1.5 percent, the highest since April 2016.
They also added to emerging market debt in their fixed income portfolios, with Asia ex-Japan bonds lifted to 3.5 percent, the highest since November 2015, and Latin American debt raised to 2.5 percent, the highest in at least five years.
“With most of developed market fixed income returning below-zero yield, the search for yield will likely continue favoring EM debt with good quality,” said Matteo Germano, global head of multi asset investments at Pioneer.
Despite the increase in their overall equity allocation, poll participants were divided over how much further the global equity bull run had to go.
Just over a third thought it had less than six months to run, but another third said it could continue for more than a year. About a quarter plumped for somewhere between six months and a year.
Joost van Leenders, chief economist, multi-asset solutions at BNP Paribas Investment Partners, said he had reduced his equity exposure, seeing little to justify the rally: “We think equities are at risk for a correction and we are positioned accordingly.”
Jan Bopp, asset allocation strategist at Bank J Safra Sarasin, was also cautious, citing weak earnings growth.
“Based on the current valuation, I do not see any scope for further price gains. Instead, with the upcoming U.S. presidential election in November, the political risk is rapidly rising and the risk of setbacks is increasing,” he said.
But other participants were more sanguine, citing loose monetary policy and U.S. growth as supportive factors.
There was greater consensus on the number of interest rate rises expected from the U.S. Federal Reserve this year, with the vast majority of respondents who expressed a preference saying one hike was most likely.
Although poll participants completed the survey before Federal Reserve chair Janet Yellen’s speech at Jackson Hole, Wyoming the hawkish line from Fed officials in the run up to the meeting was noted.,
“Economic momentum has improved, unemployment continues to come down, and the Fed’s preferred measure of inflation is above 1.5 percent,” said Chris Paine, director of research, multi-asset at Henderson Global Investors.
“The justification for such low interest rates is lessening.”
(Additional reporting by Maria Pia Quaglia Regondi; Editing by Catherine Evans)