U.S. funds turn to North American stocks, away from European shares

[August 29, 2014]  By Ashrith Doddi
(Reuters) - U.S. money managers recommended the largest holdings of American and Canadian stocks for at least three years in August, but kept their overall allocation to equities unchanged from July, a Reuters poll found.

Steady hiring in July and a rebound by the economy fueled another rally in U.S. stocks during the month. The S&P 500 closed above 2,000 this week for the first time and the dollar index jumped to 82.5, its highest in over a year.

But the expected timing of the first U.S. Federal Reserve interest rate hike remains the second quarter of next year, leading money managers to believe the stock market will keep rising for a while yet.

U.S. Fed Chair Janet Yellen suggested in a speech at Jackson Hole last week that she was still in no hurry to raise rates from their record low, since the labor market has not yet recovered completely from the financial crisis.

The survey of 12 money management firms showed no changes in allocations in their model portfolio. Stocks still make up 56.1 percent of holdings and cash accounted for 4.9 percent, a six-year high.

But some fund managers said that conflict in Ukraine, which has led to a series of sanctions and counter-sanctions between the West and Russia, was reflected in the poll results.
 

"I suspect some of the positive influences are trumping the concerns. We all know the concerns – geopolitical risks, high valuations and the end of QE," said David Joy, senior investment strategist at Ameriprise Financial.

"The U.S. stock market seems to have some continued upside momentum and it feels like it wants to go higher. I think that's embedded in the lack of reallocation."

Over the past three months, fund managers have cut their recommended European equity allocations by 2 percentage points, from 15.3 in May to 13.3 percent in August, as the threat of deflation boosted demand for government bonds.

"It's probably geopolitical, with what's going on in Ukraine," Joy said. "It will calm down, then the next day there will be a headline to suggest it will flare up again. I think that's got some European markets on edge."

Expectations the European Central Bank will loosen monetary policy have led fund managers to increase their recommendations to buy European bonds. Yields on German 10-year Bunds plunged below 1 percent this month.

A separate Reuters poll of economists on Thursday showed a 75 percent chance the ECB will begin a quantitative easing program and buy asset-backed securities.

Within the global fixed-income portfolio, allocations to government securities - by far the preferred kind of bond - rose to 41.4 percent from 40.6 percent at the expense of investment- grade bonds. That comes despite the imminent end of Fed QE.

Other minor changes to equity recommendations include a reduction in Asia-ex Japan equities - which include Russian shares - for the fifth straight month.

For a related table, click [ID:nL3N0QY51M]

European poll table and story [EUR/ASSET]

UK poll table and story [GB/ASSET]

Japan poll table and story [JP/ASSET]

China poll table and story [CN/ASSET]

(Additional reporting by David Randall and Ross Kerber; Polling by Sarbani Haldar and Siddharth Iyer; Editing by Ross Finley, Larry King)

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