British investors like bonds as U.S. rate hike bets delayed-poll
LONDON Oct 31 (Reuters) - British fund managers have nudged up bond holdings to four-month highs in October and trimmed equities on expectations that an uncertain economic backdrop in the United States will keep interest rates low for longer.
The Federal Reserve on Wednesday said it plans to stick to $85 billion a month of bond purchases under the quantitative easing (QE) programme for now, as it waits to assess the impact on the economy of this month's 16-day government shutdown.
It added that rates will remain near zero until the jobs picture improves, prompting traders of rate futures to bet that rates will not rise until 2015.
A monthly survey of 14 British-based investment managers showed average bond holdings rising to 24.4 percent, their highest since June. Equity allocations, meanwhile, eased back to 54.1 percent from 55.2 percent the previous month, though remaining a clear overweight.
"Now that the U.S. politicians have found a way, temporarily, to settle their differences on the U.S. debt ceiling and government funding, markets can begin to refocus on the delicate balance between economic activity, employment conditions and unwinding the monetary stimulus," said Mark Robinson, chief investment officer at Berry Asset Management.
"It seems increasingly likely that tapering QE will begin in early 2014, not late 2013, suggesting that we may have a more stable backdrop for markets in the run-up to the year- end."
The increase in bond holdings comes from a low of 23 percent in August, just before the Fed surprised markets by postponing the reduction in stimulus expected in September.
Fed policy though was unanimously cited as the biggest risk to portfolios, with investors concerned that an unexpectedly early reduction in stimulus - or indeed any lack of clarity from the central bank - would cause market volatility and could hurt nascent economic growth.
Given such risks, corporate bonds were most consistently listed as fixed income overweights by the funds, arguably offering greater protection from any future interest rate rises than sovereign paper, and also well-placed to benefit from improvement in company prospects as economic growth picks up.
"We have ... reduced our exposure to interest rate- sensitive fixed income and increased our allocation to cyclical fixed income sub-sectors such as financials and high-yield," said Matthew Farrell, investment specialist at London & Capital.
In equities, despite signs of an economic recovery, investors remained relatively cautious, favouring defensive healthcare - whose revenues tend to be well-cushioned against swings in the economic cycle.
The third quarter earnings season has offered limited reassurance so far, with 50 percent of European companies which have already reported missing earnings expectations, while 68 percent undershot on top-line revenues, according to StarMine in a sign that profits continue to be buffered by cost cuts.
"Of some concern is the difficulty companies are having in finding 'top line' growth, which suggests that despite an unprecedented period of extremely low interest rates and extraordinary monetary policy, economies are still finding the going heavy," said Thomas Beckett, CIO at Psigma IM.
"We are hopeful that conditions continue to improve, but are mindful that economies remain very sensitive to what, in the past, might have been considered relatively minor changes in policy and swings in confidence."
(Editing by Stephen Nisbet)