British investors cut bonds, shift to cash in unpredictable world: Reuters poll

LONDON (Reuters) - British investment managers have cut back on bonds and increased reserves of cash as they warn of market volatility across asset classes in the year ahead, a Reuters poll found.

Investors attributed the trend to expectations that bond yields are likely to start rising, after being squeezed in recent months by deflationary pressures - meaning the bonds themselves will change hands for less.

According to a monthly poll of 12 fund managers and chief investment officers at UK-based institutions, published on Friday, the average allocation to bonds in a global balanced portfolio dropped by a percentage point in February to 23.7 percent.

"Whilst (bond) yields should remain anchored to a large extent by deflationary pressures, the extreme low levels they fell to look unsustainable and offer asymmetric risk, little potential for further upside gain but the potential for considerable downside should growth and inflation begin to surprise on the upside," said Rob Pemberton, Investment Director at wealth management firm HFM Columbus.

In contrast, the average allocation to cash, commonly used as a buffer against market volatility, rose to 8.4 percent from 6.6 percent a month earlier.

The average exposure to stocks also increased, to 53.9 percent from 53 percent. Many stocks benchmarks are trading near multi-year highs, such as Britain's blue chip FTSE 100 index <.ftse> which this week finally breached a peak not seen since 1999. Better-than-expected corporate earnings and the appeal of higher-yielding equities over bonds has helped spur stock markets higher.

However, this trend belies widespread reservations about the stability of stock markets among investors.

"We are relatively bearish on most equity markets, viewing valuations as rich," said Old Mutual Global Investors.

Diverging monetary policy paths between major economies and extraordinary measures to jump-start sluggish growth, such as money printing via central bank bond buying programs, are adding elements of unpredictability to the mix, investors warn.

"We are operating in a world of absolutely amazing actions from central bankers and currency markets are bearing the brunt of their behavior," said Tom Becket, Chief Investment Officer at Psigma Investment Management.

Becket said companies in the United States are likely to feel the impact of a strong dollar, making their exports less competitive and holding back profits.

"This could well ensure that the S&P 500 <.spx> goes nowhere for two years, while European and Japanese companies benefit from their weak currencies and our portfolios are positioned to reflect this view," he said.

(Editing by Susan Fenton)