Investors slash US exposure on rate hike fears

Linear rate move 'absurb': Expert
Linear rate move 'absurb': Expert

Global fund managers have trimmed their exposure to U.S. stocks to the lowest levels since 2008 in anticipation of a U.S. Federal Reserve rate rise, with increasing numbers expecting the central bank to move in the second quarter of this year.

In March, a net 19 percent of global asset allocators polled in Bank of America Merrill Lynch's regular fund manager survey were underweight U.S. equities. This marked a swing from net 6 percent overweight in February and is the biggest underweight stance on U.S. stocks since January 2008.

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In addition, the proportion of investors saying U.S. equities were overvalued surged to 23 percent, the highest level since May 2000.

The bank's March survey also showed that investors now saw the Fed's first rate hike taking place earlier than before. The proportion of investors expecting the Fed to raise rates in the second quarter rose to 34 percent, from 28 percent last month.

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

An total of 207 panelists with $565 billion of assets under management participated in the survey between March 6-12, 2015.

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The Fed is set to meet Tuesday, with all eyes on the statement following its two-day meeting due Wednesday.

Speculation has mounted that the Fed could drop the word "patience" from its guidance about the pace at which it will normalize monetary policy—a sign that it could start raising rates as early as June.

It will also release economic forecasts, and Fed Chair Janet Yellen will hold a briefing.

Fed survey: Fed's behind the curve
Fed survey: Fed's behind the curve

While those surveyed by BofA ML pared back their U.S. equity exposure, allocations to euro zone and Japanese equities both increased. The survey suggested that the "shift to Europe has only just begun".

A net 63 percent of respondents said Europe was the region they would most like to overweight in the coming 12 months—a record since the bank first asked the question in 2001. The reading has spiked from a net 18 percent preferring Europe in January.

"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," said Manish Kabra, European equity and quantitative strategist at BofA ML.

The move out of U.S. equities is also set to continue. Some 35 percent of investors said the U.S. was the region they would most like to underweight, which is the most bearish reading in almost 10 years.