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Reuters poll - European funds add to euro zone holdings, cut US stocks

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Reuters poll - European funds add to euro zone holdings, cut US stocks

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By Claire Milhench LONDON (Reuters) – European fund managers added to euro zone stocks and bonds in July, taking the view that the European Central Bank (ECB) is unlikely to raise rates before the end of 2018. The Reuters monthly survey of 16 European asset managers, conducted between July 17-26, showed investors cutting their U.S. equity exposure to 15-month lows but boosting holdings of euro zone equities to 34.2 percent, up 2 percentage points from June. Allocations to euro zone bonds rose to 59.1 percent, the highest level since April. European shares <.STOXX> look set to end the month flat after gaining 5 percent year-to-date, although a stronger euro <EUR=> could test their resilience, said Nadege Dufosse, head of asset allocation at Candriam. Investors have been looking for clues as to when the ECB will start reducing its asset-purchase scheme, but the bank left its ultra-easy monetary policy unchanged at its July meeting and did not even discuss clawing back stimulus. Not surprisingly then, 83 percent of poll participants who answered a question on four major central banks thought the ECB and the Bank of Japan (BOJ) were least likely to be in policy-tightening mode by the end of 2018. The BOJ kept monetary policy steady in July and pushed back the timing for achieving its ambitious inflation target. “Given the weakened trade-off between unemployment and wage growth in Japan and to a lesser extent in the Eurozone, it will take more time for the BOJ and ECB to justify a full return to conventional policy rate hikes,” said Peter van der Welle, a strategist at Robeco. In contrast, the U.S. Federal Reserve is expected to remain on a tightening path and to start reducing its bond holdings soon, a step it alluded to at its July meeting. Investors cut exposure to U.S. stocks by just over 1 percentage point to 35.8 percent of their global equity portfolios, the lowest level since April 2016. U.S. stock markets <.SPX> <.DJI> surged to fresh record highs in July, but investors appear increasingly uneasy about stretched share price valuations. Boris Willems, a strategist at UBS Asset Management, said that with expectations elevated, U.S. equities were vulnerable to disappointment. “As markets have already priced in some of (President Donald) Trump’s promises to a certain degree, the potential for a correction remains if the administration is not able to meet market expectations,” he said.

GRIDLOCK Trump has struggled to push through his repeal of Obamacare, whilst a federal investigation into possible collusion between Trump’s 2016 presidential campaign and Russia rumbles on. A slim majority of poll participants who answered a question on Trump thought he would see out his four-year term. “The legislative gridlock – which is emerging in the current administration and confirmed by the recent failure on the healthcare bill – could weigh on next year’s mid-term election results,” said Matteo Germano, head of multi-asset at Amundi Asset Management. Jan Bopp, an asset allocation strategist at Bank J Safra Sarasin, argued that if the Democrats took control of the House of Representatives chamber in 2018, Trump would “almost certainly” be impeached. Otherwise it would require “smoking gun” evidence of criminal behaviour to turn the Republicans against him, he said. Investors cut overall exposure to equities to 42.5 percent of their global balanced portfolios, the lowest level since Trump was elected last November. In another sign of caution, bond holdings rose to 41.2 percent and cash increased to 8.1 percent, the highest since April. Germano said market complacency had increased further, and any policy mistake from central banks would have a strongly negative impact on markets. Three-quarters of poll participants who answered a question on implied volatility thought it was too low, as measured by the VIX, and expected it to spike higher. “The 2017 stock market drawdowns are the lowest on record so far,” Bopp said. “History suggests the stretch of calm won’t last. But central banks remain accommodative and the global earnings picture keeps on improving. Those two can make up for a lot of other sins.” (Additional reporting by Maria Pia Quaglia Regondi, editing by Alister Doyle)
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