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LONDON (Reuters) - Global investors raised their euro zone equity holdings in May, betting the rally has further to run, but cut their exposure to UK assets, reflecting uncertainty around the outcome of a snap general election, a Reuters poll showed on Wednesday.
The Reuters monthly asset allocation survey of 47 fund managers and chief investment officers in Europe, the United States, Britain and Japan was carried out between May 15 and 30, after an emphatic win for pro-European Union (EU) candidate Emmanuel Macron in the French presidential elections.
This triggered a relief rally in European equities, which pushed towards a two-year high, as the threat to the EU from far-right candidate Marine Le Pen was neutralised.
It also encouraged fund managers to raise their euro zone stocks exposure around 1 percentage point to 18.7 percent of their global equity portfolios, the highest level since August 2016, the survey showed.
"Now that the political risk in France has diminished, investors have become much more optimistic about the future performance of European equity markets," said Jan Bopp, asset allocation strategist, Bank J Safra Sarasin, adding that European economic data also looked much better.
Poll participants who answered a special question on whether there was further upside for European equities were unanimous in their agreement, with several saying valuations still seemed cheap compared with U.S. equities, while European corporate earnings were improving.
Peter van der Welle, a strategist at Robeco, acknowledged that the bar for European equities had been raised given the huge inflows and the fact that the Macron victory was discounted by the market. But he remained overweight euro zone equities saying: "In our view (the) euro zone's economic growth momentum has further to run."
Political risk is rising again, however, as over the weekend Italy's 5-Star movement voted in favour of a proportional electoral system, raising the chances of an autumn general election.
Investors were less bullish on the outlook for UK assets, cutting their exposure to UK stocks by 1 percentage point to 9.2 percent of their global equity portfolios.
They also trimmed their UK bond holdings by 1 percentage point to 8.9 percent of their global fixed income portfolios.
Prime Minister Theresa May's decision to call a snap general election for June 8 has added to the uncertain outlook for UK assets, which are still overshadowed by the prospect of Britain's negotiations to leave the European Union.
May called the election in a bid to strengthen her hand in the Brexit negotiations by increasing her majority.
But a projection by polling company YouGov suggested May could lose her majority in parliament, raising the prospect of political deadlock as formal Brexit talks begin.
The prospect of a hung parliament pushed sterling lower, towards a one-month low touched on Friday, before the currency recovered somewhat.
A 68 percent majority of poll participants who answered a question on sterling thought the pound would rise in the event of an increased majority for the Conservative party, but several thought gains would be modest.
A few also said an increased majority might create more problems for May from hardliners in her party. "Backbenchers tend to be more 'misbehaved' when governments have super large majorities," said Ken Dickson, investment director at Standard Life Investments.
Matteo Germano, global head of multi-asset investments at Pioneer Investments, agreed that a larger majority raised the risk of a hard Brexit, and added: "If instead their majority is thin, the political landscape will become more confused, adding again some uncertainty premium to the GBP."
Overall, equities edged up from last month's 46.8 percent to 46.9 percent of global balanced portfolios, the highest since January 2016. Bond holdings rose to 39.9 percent, the highest since February.
Trevor Greetham, head of multi-asset at Royal London Asset Management (RLAM), expressed some caution: "Global growth is coming off the boil and inflation pressures are easing. This is good for bonds but stocks may not take bad news kindly and we have taken profits after a good run."
He did not think the bull market was over, however, and would buy on a dip.
Just over half of poll participants who answered a question on historically low financial market volatility thought it was a benefit to their portfolios, as it made hedging via options very cheap.
But over a third said it was a risk. Rob Pemberton, investment director at HFM Columbus, argued that low volatility bred complacency and risk-taking, making markets more vulnerable to a sharp correction.
In previous periods of low volatility - 1993-94 and 2006-07 - major market dislocations followed.
A U.S. political crisis blew up in May over alleged Russian meddling in the 2016 presidential election and communication between Russia and Trump's campaign and transition team, making some investors wary.
"Although we were itching to adopt a more aggressive risk profile by overweighting equities, we stopped short of doing so because of disappointing macro data and the steady flow of discomforting news from Washington," said Robeco's van der Welle.
Additional reporting by Maria Pia Quaglia Regondi; Editing by Toby Chopra