European funds most bullish on stocks in two years

European fund managers were the most overweight in equities in more than two years in May and cut bonds and cash as they grew confident central banks would keep supporting economic recovery by providing cheap cash.

Reuters' monthly survey of 20 asset managers in Europe, excluding Britain, showed that equities accounted for 47.5 percent of investors' global balanced portfolios on average this month, the highest since February and up from 46.7 percent in April.

They are now the most overweight in equities since March 2011, having turned from underweight in August.

European fund managers cut bond holdings for the second month in a row, to 39.2 percent from 39.4 percent last month, the poll showed.

Cash levels fell to 6.9 percent of their portfolios, from 7.3 percent in April.

"For now, the combination of likely-to-be extended central bank support, sufficient economic activity and a lack of sound investment alternatives keeps the risk-on mood alive," said Boris Willems, strategist at UBS Global Asset Management.

The poll was conducted between May 21 and 28, when concerns that the Federal Reserve may soon scale back its monetary stimulus pulled world stocks off five-year highs <.MIWD00000PUS>.

However, assurances from central bankers from Japan and Europe that liquidity taps will remain open calmed investor nerves.

"We are generally positioned to benefit from a continued liquidity-driven rally. Given a number of prevailing tail risks, of which global GDP growth and euro zone woes are the most pressing ones, risk management remains indispensable," Willems said.

Poll respondents lifted their allocation to North American stocks to 36.5 percent, the highest since January.

Allocation to Japanese stocks ticked lower to 7.9 percent from 8.0 percent, which was the highest since July 2009.

Tokyo stocks <.N225> have been volatile in the past week after gaining nearly 70 percent over the past six months.

Optimism has been driven by Japanese Prime Minister Shinzo Abe's aggressive monetary and fiscal stimulus policy that caused a sharp decline in the yen.

Investors are most overweight in global financial sector stocks, while they were underweight on consumer discretionary, healthcare and IT services.

(Editing by Susan Fenton)