U.S. funds favor equities on hopes of a stronger economy ahead: Reuters poll

(Reuters) - U.S. funds recommended increasing equity allocations in April on optimism the global economy is finally making a broad-based recovery, but they also favored bonds as plenty of risks still remain, a Reuters poll showed.

"We have a really positive outlook for stocks. We have got a situation where for the first time in several years, various parts of the global economy are improving together and that creates some optimism," said Jeffrey Layman, chief investment officer at BKD Wealth Advisors.

The positive tone on the global economy is based on manufacturing and trade gains in major economies, but a separate Reuters poll showed a rise in protectionism remains one of the major threats. [ECILT/WRAP]

In the latest survey of 13 U.S.-based fund managers, conducted April 18-28, recommended equity allocations were raised to 55.4 percent from 54.6 percent and bonds allocations were pushed slightly higher to 35.5 percent from 34.6 percent.

"It is hard to make a compelling returns case for bonds as this is not an environment where you would expect bond returns to be particularly strong," said BKD's Layman.

"But they still play a very important role in the sense of being the first line of defense against stock market volatility, which we think is likely to pick up as we get further into the year."

Stock markets have see-sawed since U.S. healthcare reform legislation failed after a blistering rally at the start of the year on hopes President Donald Trump would push reflationary policies.

"Domestic fiscal policy questions abound and represent a near term risk if the new Administration fails to deliver on its promises," said Alan Gayle, director of asset allocation at RidgeWorth Investments.

"But the underlying firmness in the economy and corporate profits suggests that any stock market correction will be limited in both magnitude and duration."

While fund managers welcomed the latest announcement on tax reform this week, they said any significant near-term moves in stock markets will be driven more by day traders.

"Markets are going to be in an ebb and flow mode after the U.S. administration mentioned the start of the tax reform package this week and we expect that to be the case in the short run," said Layman.

"But that is going to be much more influenced by algorithmic traders and the shorter-term traders rather than by institutions like ours."

Broadly, funds recommended a trim to cash and property holdings while allocations for non-traditional instruments such as derivatives and commodities were unchanged from March.

While regional breakdowns showed funds shunned European assets ahead of the second round of France's presidential race, they were generally more upbeat in their view.

"We have been conditioned to expect negative surprises but there is potential for some positive outcomes as well," added BKD's Layman.

(Additional reporting and polling by Rahul Karunakar; Editing by Toby Chopra)