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British fund managers upped their exposure to UK equities during December, buoyed by hopes of bumper dividends from cash-rich companies and expectations of a 2011 takeover boom, a Reuters poll has found.
A survey of 12 investment managers showed the average allocation in global equity portfolios to UK stocks jumped to 16.3% from 12.6% in November, indicating strong confidence in Britain's economic outlook and the relative value of UK stocks over "fashionable" emerging market equities.
"It is possible that we might run with our maximum equity weightings next year, although our focus will be on 'quality' companies in the developed world markets, which our research suggests are trading at an almost unprecedented discount to emerging market and lesser-quality companies," Thomas Becket, chief investment officer of PSigma Investment Management, said.
Becket said many UK companies were in compelling financial shape, holding large sums of surplus cash that may find its way back to investors in the form of dividends and share buybacks.
That same cash could also help fuel fresh merger and acquisitions activity in 2011, he said.
Based on data provided by the same 11 fund managers polled last month, allocations to UK equities rose to 13.3%.
While the overall equities allocation climbed 1.4 percentage points to 54.2% in December, fund managers cut euro zone equity holdings again amid fears of economic contraction across the region, particularly in Portugal and Spain.
Average euro zone equity allocations dropped to 14.5% from 15.2% on a like-for-like basis, and even lower still to 13.8% in December's enlarged poll.
"It is unclear as to how the Euro zone periphery situation will be resolved," said Alec Letchfield, chief investment officer, UK Wealth, at HSBC Global Asset Management.
"What is clear, however, is that greater unity is required in the European policy response … the disparity in growth rates between core Europe and peripheral Europe are, if anything, likely to widen further," he said.
Although sentiment towards euro zone stocks continued to wane in the last poll of 2010, respondents flagged a growing appetite for riskier investments like hedge funds and private equity, with the average exposure to alternatives rising to 16.4% based on the enlarged poll sample — the highest level seen in more than a year.
Exposure to cash fell for the fifth consecutive month to 4.9% from 6.3% in November.
Investment managers sharply cut their percentage allocations to UK gilts in their global bond portfolios in December, in the same month a Bank of England survey revealed expectations for inflation over the next 12 months had accelerated to 3.9%, almost double central bank targets.
Average allocations slumped to 17.9% from 20.7% on a like-for-like basis, and to 17.3% in the enlarged December poll.
