LONDON (Reuters) - Global investors pared back equity holdings as 2012 wound down, preferring to bank gains from a surprisingly bullish year as they awaited a green light from U.S. budget negotiations.
With another roller coaster year underpinned by central bank money printing, signs of U.S. and Chinese recoveries and a significant breakthrough in the euro zone debt crisis meant world markets are finishing the year on a high.
The MSCI developed and emerging equities indexes are up over 17 percent, for example, and few if any of the major equity markets are on course to end 2012 in the red.
Respondents to Reuters' latest monthly poll of 55 asset managers from the United States, Britain, continental Europe and Japan said they remained upbeat for the year ahead, backing moves into euro zone stocks and bonds, Chinese equities and emerging market debt in their hunt for yield.
But strategic asset allocation mixes appeared to stay cautious on lingering fears of the U.S. "fiscal cliff" -- the automatic tax and spending crunch Democrats and Republicans have seeking to avoid since last month's election.
"Provided both sides of the U.S. political divide can find a way to resolve the current U.S. ‘fiscal cliff' impasse, and we can overcome other headwinds ... 2013 will hopefully see a further improvement in confidence," said Mark Robinson, chief investment officer of Berry Asset Management.
The poll shows global investors have more conservative positions on average this month than a year ago and the highest bond allocation in at least three years, with many citing tensions over the year-end deadline on the so-called cliff of harsh tax hikes and spending cuts that could damage an already weak economy.
"I remain neutral on the markets while the uncertainty and risks surrounding the (fiscal cliff) are resolved," said Alan Gayle, chief strategist at Ridgeworth Investments.
The stalled U.S. fiscal talks grew more heated on Wednesday and threatened to become even more so Thursday when the action is expected to shift for the first time to the floor of the U.S. House of Representatives.
Stock holdings are at 49.7 percent on average in the poll this month, down half a point from last month and 1.6 percentage points from December 2011.
Compared to the same time last year, allocation to bonds is 4.4 percentage points higher -- benefiting investment grade corporates, while high-yield and government debt are down.
Looking forward to 2013, a deal on the fiscal cliff -- still the baseline scenario for most -- is likely to push investors back towards stocks, fund managers said.
World shares steadied near 17-month highs on Thursday, ending a week-long rally, while oil slipped as the latest setback in talks to avert a U.S. fiscal crisis kept buyers away.
Investors see risks to global growth and the euro debt crisis as the biggest challenge to their investment positions next year, with the fiscal cliff a close third, the poll showed.
Asked which would be the best-performing markets next year, a majority said the U.S. dollar would be the top-performing currency, while under-valued euro zone stocks took the top spot for developed equity markets and China was the favorite among emerging stock markets.
"With the progressive decrease of political risk perception in Europe, investors should be able to focus more on fundamental aspects of investments. Italian or Spanish equity markets offer an attractive valuation with much more re-rating potential than core euro zone markets," said Nadege Dufosse, senior asset allocation manager at Dexia Asset Management.
British investors bucked the trend, greeting the year-end with a sharp increase in the amount they invest in shares, reflecting hopes that economic stability and rising corporate profits will return next year.
Their average allocation to equities in global balanced portfolios jumped to 52.3 percent in December, from 50.8 percent a month earlier.
"The risks facing markets in 2013 are more likely to be normal risks, as opposed to the systemic, potentially extreme risks which markets faced in 2012," said Alec Letchfield, chief investment officer for UK Wealth at HSBC Global Asset Management.
U.S. fund managers, however, adopted their most defensive stance so far this year, with average equity holdings hitting a more than 13-month low.
Japanese fund managers trimmed their asset allocations to shares slightly on concerns about the U.S. fiscal cliff, although they remained modestly optimistic about the global economic outlook in the medium term.
Additional reporting by Chris Vellacott and Alice Baghdjian in London, Maria Pia Quaglia in Milan, David Randall in New York, Aakanksha Bhat and Rahul Karunakar in Bangalore, Hideyuki Sano in Tokyo. Graphic by Vincent Flasseur. Editing by Stephen Nisbet/Mike Peacock