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Investors migrating out of US equities amid expectations of Fed rate hike

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Global investors have significantly pared back US equity allocations as belief grows that the US Federal Reserve will raise rates in the second quarter, according to the BofA Merrill Lynch Fund Manager Survey for March.

A net 19 per cent of global asset allocators are now underweight US equities – the biggest underweight since January 2008 and a big swing from a net six per cent overweight in February. The proportion of investors saying US equities are overvalued has reached its highest since May 2000 at a net 23 per cent.

Allocations to eurozone and Japanese equities have both increased, but investors have indicated that the shift to Europe has only just begun. A net 63 per cent of respondents say that Europe is the region they would most like to overweight in the coming 12 months – a record since the question was first asked in 2001. The reading has spiked from a net 18 per cent preferring Europe in January.

The move out of US equities is also set to continue. A net 35 per cent says that the US is the region they would like to underweight the most, the most bearish reading in nearly 10 years. The spread between Europe and the US has soared to 98 net percentage points – also a record.

The March survey indicates that investors have started to bring forward the date of the Fed’s first rate hike, rather than continue to push it back. The proportion of investors expecting the Fed to raise rates in the second quarter has risen to 34 percent, from 28 per cent. The number expecting a rate rise in the third quarter has fallen. Accordingly, a net 2 per cent of the panel has taken the view that the US dollar is overvalued – the first overvalued reading since 2009.

“Investor consensus suggests that the strong dollar will act as positive rather than a negative for the global economy and markets,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. 

“Bullishness towards European stocks has reached uncharted territory. Demand for financials highlights confidence in domestic growth, while belief in European exporters is building on gains seen last month,” says Manish Kabra, European equity and quantitative strategist.

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