Expensive share valuations and mid-month tensions between Washington and nuclear-armed North Korea contributed to the waning enthusiasm for equities, despite clear signs that central banks in Europe, the United States and Japan are in no rush to end their stimulus programmes.
Funds rushed instead for bonds, seeking safety as well as the likelihood of more yield compression after the European Central Bank returned to dovish mode after end-June comments that led markets to speculate it could soon start removing its 60 billion euro monthly stimulus. The poll was conducted August 16-29, soon after Trump traded bellicose rhetoric with North Korea, wiping $1 trillion off world stocks. But none of the investors responding to a special question on the subject expected war between the two sides this year, though they saw tensions likely to simmer.
Most declared themselves bullish on European stocks, with 85 percent of respondents to a special question predicting the market would scale fresh heights in coming months. But most also warned the euro - up around 5 percent this year on a trade-weighted basis - could pose a problem.
European stocks are up 3 percent this year, falling in August for the third month in a row. The poll showed European equity exposure down more than 1 percentage point from last month at 33.3 percent. Nadege Dufosse, head of asset allocation at Candriam, noted recent robust data as proof that the bloc's economic recovery was continuing apace, while the political backdrop too was supportive, with euro-sceptic parties on the backfoot.
"An accommodative central bank and strong corporate earnings momentum underpin the attractiveness of the region's risk assets," Dufosse said, but warned: "The recent increase in the euro currency has been a headwind to equities' outperformance."
On the other hand, the strong euro, by dampening inflation, is also "moderating Eurozone inflation and could thereby deter the ECB from a more outspoken reduction of (stimulus), lifting Eurozone stocks," Robeco strategist Peter van der Welle said.
European equities have more upside if the economic upswing continues, he added. Euro bond holdings rose to 59.7 percent, the highest since last November. German 10-year bond yields are set for their biggest monthly fall in six months. Meanwhile, US bond holdings held steady at 20 percent while equity exposure stayed close to three-month lows touched last month, with investors continuing to voice concerns over lofty Wall Street share prices.
Copyright Reuters, 2017