By Claire Milhench
LONDON (Reuters) - European fund managers raised their U.S. equity holdings to the highest level in at least five years in July, but they slashed their emerging-market stocks exposure, worried about the impact of a full-blown trade war.
The Reuters monthly asset-allocation poll of 21 European fund managers was conducted July 16-30, during which the U.S. economy reported second-quarter growth of 4.1 percent, the fastest pace in nearly four years.
However, this was partly driven by U.S. farmers rushing shipments of soybeans to China to beat retaliatory trade tariffs after the United States imposed 25 percent duties on $34 billion worth of Chinese goods.
Notwithstanding the trade conflict between the world's two largest economies, the S&P 500 <.SPX> looks set to end the month up around 3 percent, with investors boosting their U.S. stocks exposure by 4.9 percentage points to 46.5 percent.
They also raised their global equity holdings by 3.8 percentage points to 43.8 percent, the highest level since March, and cut bonds by 2 percentage points to 39.2 percent.
"It looks to be too soon to call an impending bear market," said Pascal Blanque, group chief investment officer at Amundi.
Guilhem Savry, head of macro and dynamic allocation at Unigestion and portfolio manager of the Multi Asset Navigator Fund, was also comfortable retaining an equity overweight in his tactical portfolio.
"We believe that the projected rebound in macro indicators in the second half of this year will turn momentum positive again," he said.
Investors cut their U.S. bond holdings by 3.2 percentage points to 23.4 percent, with 81 percent of poll participants who answered a question on the U.S. 2- to 10-year Treasury yield curve not expecting it to invert by year-end.
An inversion of the curve - the spread between short-term and long-term debt securities - is considered a signal of recession
"The pro-cyclical growth policies pursued by the U.S. administration and President Trump's awakening criticism about the Fed's interest rate policy are factors that could counteract further flattening of the U.S. yield curve," said Peter van der Welle.
Investors were less comfortable with the outlook for emerging markets given rising U.S. protectionism, cutting their EM equity exposure to 14.9 percent from June's 17.7 percent.
The United States struck a deal with the European Union in July to suspend the imposition of any new tariffs, but Trump threatened fresh measures against China.
Asked to identify the equity markets likely to suffer most in the event of a full-blown trade war, most poll participants chose emerging and frontier markets.
Raphael Gallardo, a strategist at Ostrum Asset Management, highlighted China, but also Taiwan and South Korea, "because of the close links of their manufacturing sectors with China's, which acts as a supplier of semi-finished products and assembly line, notably in technology".
Poll participants who answered a question on Britain's attempt to leave the European Union were almost unanimous in expecting UK Prime Minister Theresa May to deliver Brexit.
In July, May said she would lead the talks with the EU after a showdown with cabinet ministers that triggered resignations.
Investors cut their exposure to UK equities to 5.9 percent, while UK gilt holdings fell to a one-year low of 2.6 percent.
Jan Bopp, an investment strategist at Bank J Safra Sarasin, said an "association agreement" between the UK and EU was the most likely outcome, "but we expect PM May to muddle through the summer. The bar for a no-deal outcome remains high".
(Reporting by Claire Milhench and Massimo Gaia, editing by Larry King)