UK Investors Buy Euro Zone Stocks And Cut Cash Safety Nets

Fund managers stopped short of calling a sustained market recovery, however, given the economic picture remained troubling and was only being tempered by expectations of remedial action by central banks.According to a monthly survey of UK investment managers in which 14 managers and chief investment officers took part, the average allocation to the euro zone in global equity portfolios rose three percentage points to 11.7 percent in August.

The sharp hike in euro zone stock exposure came at the expense of UK shares - down to 26.5 percent from 27.1 percent in July - and the U.S. where allocations dropped to 33.4 percent from 34.5 percent.

"In some parts of the world, particularly Japan and Europe, equities have rarely been cheaper," said Thomas Becket, chief investment officer at Psigma Investment Management.

Overall exposure to stocks in global balanced portfolios remains near lows for the year following months of volatility and risk aversion stemming from the macroeconomic uncertainty surrounding the European sovereign debt crisis.

But the average allocation to stocks did recover in August, by more than a percentage point from a month earlier to 48.5 percent from 47.4 percent.

"Equities look very appealing when compared with government bonds - with an extremely high risk premium," said Dirk Wiedmann, Head of Investment at Rothschild Wealth Management.

Safe haven cash holdings in balanced portfolios dropped a percentage point to 7.1 percent while bond and property exposure remained unchanged at 28.3 percent and 2.8 percent respectively.

Some fund managers, however, have already pared equity allocations to bank some profits.

"We don't think now is a good time to raise our equity allocation. Profit margins are currently at peak levels," said Wiedmann.

"We have used recent equity market strength to reduce a moderate overweight equity stance to neutral, by selling Europe ex UK equities," said Ken Adams, Head of Global Strategy - Investment Solutions at Scottish Widows Investment Partnership.

"Expectations of new ECB policy initiatives to solve the euro zone crisis have been to a large extent discounted, leaving markets once again vulnerable to bad news."

Some warned against being lulled into complacency after a comparatively buoyant summer on equity markets.

"The global economic outlook has become increasingly murky but investor risk appetite has been buoyed by expectations of further monetary easing," said Neil Michael, executive director of investment strategies at London & Capital.

"Equity market volatility has fallen to unrealistically low levels."