By Sujata Rao
LONDON (Reuters) - Global investors have stepped up euro zone and emerging equity holdings while cooling toward France in the volatile run-up to its presidential election, a monthly survey showed on Tuesday.
Bank of America Merrill Lynch's (BAML's) poll of investors managing $632 billion worldwide was conducted from Feb. 3-9, a period when far-right candidate Marine Le Pen and centrist Emmanuel Macron emerged as front-runners in the French election as conservative Francois Fillon was hit by a finance scandal.
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National Front leader Le Pen, campaigning on an anti-EU, anti-euro stance, is hoping to pull off a Donald Trump-style upset, though polls suggest she will lose in the second round run-off in May. French stocks have lagged European peers, rising 0.5 percent so far this year versus a 2.3 percent rise on the broader pan-European index
Across the continent there are signs of economic recovery and inflation - a happy combination for equity markets, which are also being buoyed by expectations of extra U.S. stimulus via tax cuts and deregulation under Trump.
Global investors' allocation to euro zone equities rose to eight-month highs, according to the poll, with a net 23 percent now overweight the market, up from 17 percent in January. A quarter of investors see them as undervalued, while 78 percent reckon U.S stocks are overvalued.
Sentiment toward France, however, was at its lowest level in two years.
"While global fund manager sentiment toward Europe improved slightly, there is an increased fear of European political risk, with sentiment toward French equities particularly low," said Manish Kabra, European equity quantitative strategist at BAML.
The Netherlands holds an election in March, while Germany votes in September. More than a third of investors identified European elections leading to euro zone disintegration as the biggest tail risk, while 32 percent named a trade war and 13 percent feared a bond market crash.
On the other hand, sentiment globally remains buoyant, with most investors still betting on equity gains ahead. Trump's promise this week to introduce a "phenomenal" tax reform has spurred the market capitalization of the S&P 500 past the $20 trillion mark.
A net 28 percent of investors – the highest proportion since September 2006 – saw the U.S dollar as overvalued. The euro meanwhile was seen as undervalued by a net 15 percent of fund managers, the largest proportion since 2003.
Despite the strong dollar, investors piled into emerging markets, with allocations swinging to a net 5 percent overweight compared with 6 percent underweight in January, the biggest month-on-month jump in 11 months.
MSCI's emerging equity index has risen 8.7 percent this year to 19-month highs, thanks to robust commodity prices and a recovering U.S. economy.
The allocation to British stocks was stable at a net 24 percent underweight. It has now been the most underweighted region globally for a year, BAML added.
(Reporting by Sujata Rao; Editing by Mark Trevelyan)