By Claire Milhench
LONDON (Reuters) - British investors have trimmed back their equity exposure, wary of U.S. protectionist threats, Italian political turmoil and rising U.S. bond yields but most continued to favour emerging markets despite recent hefty selloffs in the sector.
Reuters' monthly asset allocation poll of 17 UK-based asset managers was conducted between May 14-25 as investors reeled from escalating trade tensions, U.S. President Donald Trump's decision to call off a summit with North Korea, and the prospect of an anti-establishment coalition government in Italy.
The turmoil in Italy fanned fears of a renewed crisis in the euro zone, sending global markets sharply lower.
Poll participants unsurprisingly became more cautious, trimming their overall equity holdings by 1 percentage point to 52.6 percent. They also raised cash levels to 6 percent, the highest level since July 2017.
Mark Robinson, chief investment officer at Bordier & Cie (UK), identified Italian politics as a catalyst for increased market volatility even before the big sell off at the end of May when a new election appeared likely.
"On the one hand, Italy is too big to fail, but on the other the prospect of Italy being bailed out, like Greece, seems unthinkable," he said. "Overall, some caution is still warranted."
Fears of a euro area crisis prompted a stampede into safe-haven assets, pushing U.S. 10-year Treasury yields down to 2.83 percent. This reversed a move earlier in May when the yield climbed to 3.1 percent, a seven-year high.
Christopher Peel, chief investment officer of Tavistock Wealth, said a repricing of bond markets was the biggest risk facing global markets.
"The path to a higher rate environment will be volatile and negatively impact every layer of the bond market," he said.
In the poll, investors raised their overall bond exposure to 25.6 percent from 24.9 percent in April. However, around 71 percent of those who answered a question on U.S. Treasuries said they would not be buyers of the 10-year at yields above 3 percent.
Justin Onuekwusi, a fund manager at Legal & General Investment Management, remains neutral on U.S. Treasuries.
"We think they reflect fair value even at above 3 percent. The relative valuation versus other bonds are less attractive given the risk is skewed to the downside," he said.
The other big story of the month was the sell off in emerging markets Argentina and Turkey as U.S. yields climbed. Both the peso and lira plunged as investors cut exposure to markets seen as vulnerable to higher external borrowing costs.
Argentina raised interest rates to 40 percent on May 4 and sought help from the IMF, while Turkey hiked rates to 16.5 percent and moved to simplify monetary policy.
Emerging equities <.MSCIEF> look set to end the month down over 4 percent, while emerging market sovereign debt has lost around 4.5 percent this year to May 23 according to data from Bank of America Merrill Lynch.
But only 20 percent of poll participants who answered a question on the recent upheaval in emerging markets said it had prompted them to reduce their exposure.
This was reflected in allocations -- emerging equities were at 20.9 percent, from 20.6 percent in April while emerging debt was raised to 22.6 percent from 17.4 percent.
ADVERTISEMENTAndrew Milligan, head of global strategy at Aberdeen Standard Investments, said the majority of emerging markets were well placed to resist Fed policy pressures: "In other words, the weak EM candidates are very well known and that is well priced into markets."
However, Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), was among those saying he had started trimming his EM exposure in mid-April from an overweight position to a small underweight in May.
"Deceleration in global growth and a strong dollar is a bad mix for emerging markets," he said.
(Reporting by Claire Milhench; Editing by Alison Williams)
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