With eye on possible Brexit, British funds cut UK exposure
By Sujata Rao
LONDON (Reuters) - British investors have sharply cut their exposure to domestic stocks and bonds in February in favour of euro zone assets, suggesting nerves are jangling over the country's potential exit from the European Union.
Britain is due to hold a referendum on its EU membership on June 23 and as the odds on 'Brexit' have steadily shortened in recent weeks, economists and world leaders have lined up to warn of the political and economic implications of such a split.
The debate sent sterling plunging to seven-year lows after London's influential mayor Boris Johnson backed the campaign to leave.
But a commodity rout and policymakers' apparent helplessness in the face of sluggish world growth is also weighing on sentiment, with London's FTSE 100 equity index set for its fourth straight monthly fall.
"Investors have been under a cloud of investment risk ... Unfortunately, throw in a bit of geo-political risk and the investment environment becomes very volatile," said Peter Lowman, chief investment officer at Investment Quorum.
"Sterling has taken the full force of the recent uncertainty. With some large institutions predicting it could fall as much as another 20 percent on a 'No' vote, that has huge ramifications ... you could make money on the stock market and lose it on the currency," he added.
British funds' allocation to UK equities fell to 26.7 percent this month, down six percentage points from last month, while the weight of euro zone and U.S. stocks each rose more than one percentage point to 16.5 and 27.8 percent respectively.
In fixed income portfolios, the allocation to UK bonds was cut to eight-month lows of 29.6 percent, a fall of four percentage points. The euro zone's share rose to 30.9 percent, the highest in at least five years.
But in global portfolios, UK funds went heavy on bonds, a classic sign of risk aversion, boosting their exposure to 24.9 percent, the highest since September. The share of equities slipped to 49 percent, also a five-month low.
The poll was conducted between Feb. 15 and 24, a period marked by market volatility, albeit to a lesser degree than in January, as the likelihood faded of big U.S. rate rises and oil exporters seemed to agree the slide in crude prices had gone far enough.
Fears of a global recession remain however, with G20 leaders who met in China at the weekend having as predicted failed to agree new steps to revive the economy. Many reckon authorities have no choice but to turn from monetary to fiscal stimulus.
"A change of thinking on austerity is eminently possible should growth numbers continue to disappoint," Rob Pemberton, investment director at HFM Columbus Asset Management, said.
(Additional reporting by Claire Milhench; editing by John Stonestreet)
