Fund managers look to Europe

FOR the first time since Smith New Court's fund manager survey was launched in 1990 institutions do not, on balance, intend to increase their holdings of UK equities, despite being bullish on the domestic market.

This is because the 93 institutions polled already have 59 per cent of their asset allocation in UK equities, said Peter Lyon, SNC's global strategist.

Institutions remain confident about the prospects for the economy, with 15 per cent growth in earnings per share forecast for 1993 and 1994, although inflation expectations have risen slightly.

Fund managers 'remain strongly interested in raising their holdings of Continental European equities', according to the monthly Gallup survey. On balance, '78 per cent of institutions prefer French equities to German at the present time'.

Mr Lyon attributes this to expectations that Continental interest rates have further to fall than elsewhere and French rates the furthest of all. It all depends on whether French politicians can drop their obsession with parity between the franc and the mark and cut rates, he said. 'Although the door is open, the French are refusing to walk through it.'

The US is still seen as too expensive by fund managers, said Mr Lyon, while they are looking to increase their weighting in Japan.

The balance of institutions planning to run down their US weighting stands at 11 per cent, similar to recent months, while those planning to get back into Japanese equities has bounced back to 17 per cent from 5 per cent in October.

Mr Lyon said the Japanese economy was 'running way below sustainable growth levels. It would take growth of 4 to 5 per cent over five years before Japan gets back to its long term growth path'.

The potential for Japanese equities is huge, he said, despite the present sluggishness of the economy. The discount rate is at 1.75 per cent, lower even than the boom years of the late 1980s.

The fear of rising US interest rates would probably blunt any new interest in American equities, Mr Lyon added.