(Reuters) - “More caution” was the mantra of global fund managers in July, with recommended equity allocations cut to the lowest since early 2017 and suggested cash holdings increased to the highest in five months, a Reuters poll showed.

FILE PHOTO: Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 9, 2016. REUTERS/Brendan McDermid/File Photo

With no respite from trade tariffs, fund managers remain worried about the global economy despite many major central banks shifting towards policy easing, which has pushed Wall Street stocks to record highs this month.

While falling bond yields have not yet unnerved Wall Street or international stock markets, fund managers recommended a cut in global equity allocations to an average 45.7% of the model global portfolio.

Recommended allocations at the beginning of 2019 to global equities, at an average 48.5%, were the highest in a year but have been cut gradually. July’s was the lowest since March 2017.

“Some near-term caution toward stocks is warranted given the strong gains in the first half combined with a slowing global economy, renewed trade tensions and stalled corporate profits growth,” said Alan Gayle, president of Via Nova Investment Management.

“Moreover the lack of market participation outside of the large-cap S&P 500 highlights the challenge.”

A separate Reuters survey of over 500 economists showed concerns a global economic growth rut is at risk of deepening as trade tensions between the United States and its trading partners were likely to intensify this year.

There is no evidence of a resolution to deep differences between the U.S. and China in their year-long trade war, marked by tit-for-tat tariffs. U.S. President Donald Trump on Tuesday warned China against delaying a deal as a new round of talks got underway in Shanghai.

PESSIMISM

Increasing pessimism was also clear in the July 16-30 Reuters poll of nearly 40 fund managers and chief investment officers in Europe, the United States, Britain and Japan.

Suggested allocations to cash were increased to 6.5% from 6.1% in June. That was below a near four-year high of 7.2% set in February when managers ramped up cash holdings.

But despite widespread expectations most major central banks have started - or will do so soon - on the path of easing, funds cut their recommended bond holdings to 40.9% in July from 41.3% the previous month.

“We increase the allocation to cash and reduce the exposure to fixed-income ... amid the very high expectations from central banks and the very low level of interest rates,” said Filippo Casagrande, head of investments at Generali Investments Partners.

When asked where fund managers saw the most risk, the ongoing trade war was the top pick.

But a majority of respondents expected monetary policy easing to be the biggest opportunity to seek solid returns in equities, at least, provided central banks do not make a sudden shift away from current expectations.

“The markets are currently responding to the tones of central banks, which led by the Federal Reserve are all in a very dovish mood looking to offset the potential slowdown from trade wars,” said John Husselbee, head of multi-asset at Liontrust in London.

“Any central bank mood swing could spell trouble for markets as well as any signs of faltering or expansion of the trade talks.”

The U.S. Fed was expected to cut interest rates for the first time in a decade, by 25 basis points, on Wednesday amid rising risks from the trade war, according to economists a separate Reuters survey.

Echoing the findings of that survey, the latest poll showed nearly two-thirds of fund managers who answered an additional question on what the best course of action would be said the Fed should deliver a quarter-point rate cut on Wednesday.

But that is largely driven by current pricing in financial markets and the consequences of not delivering rather than a fundamental reason for policy easing.

“We expect the Fed to cut 25 basis points. However, they should hold fire until stresses and strains start to manifest more fully in the economy, thus saving their ammunition,” said Craig Hoyda, senior quantitative analyst for multi-asset strategy at Aberdeen Standard Investments.

“The market, however, will act aggressively should the Fed fail to cut.”