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Investors bulk up on risk as December rate rise eyed

Asset managers have regained some risk appetite, increasing their exposure to equities, real estate and alternative assets as a strong consensus points to a rate rise in the U.S. next month, new data shows.

Fund managers polled at the start of November have significantly hiked their allocation to equities and cut cash holdings to levels not seen since July, according to research from Bank of America Merrill Lynch.

Federal Reserve Board Chair Janet Yellen.
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Federal Reserve Board Chair Janet Yellen.

Of the 200 investors managing $576 billion of assets that were quizzed by the bank for its monthly fund manager survey, four-fifths now expect the U.S. Federal Reserve to raise rates this quarter.

Some 43 percent of managers are now "overweight" stocks, up 17 percentage points from the previous month.

After equities, real estate saw the second-largest month-on-month change in position, followed by technology and other alternative assets such as hedge funds and commodities.

"Some 81 percent expect the Fed to hike in December...up from 47 percent last month as growth expectations bounce (in China to 15-month highs) and perceptions of market liquidity rise from 3-year lows," chief investment strategist at BofA Merrill Lynch Global Research, Michael Hartnett said in a note.

Stronger-than-expected U.S. employment data in October fuelled expectations that a move from near-zero rates will take place next month. The world's largest economy added more than a quarter of a million jobs in October.

"Thanks to the recent robust job numbers and a reported 2.5 per cent increase in wage growth in the previous 12 months. We're as confident as we can be that the Fed will tighten policy on December 17," said Nigel Green, chief executive and founder of independent financial adviser deVere Group.

Long dollar is the most crowded trade according to the survey, with 32 percent of the investors polled anticipating further strength in the greenback.

The overcrowded nature of the position makes it the most "vulnerable" heading into a possible December rate rise, the bank said.

"With consensus very clustered in QE and strong dollar trades, asset price upside appears limited until an 'event' curtails the Fed hiking cycle, as in 1994," Hartnett added.

The dollar has surged against the euro since the European Central Bank's last policy meeting, where President Mario Draghi hinted that further stimulus could come as soon as December,

Gains were extended following the Paris terror attacks over the weekend, with greenback currently trading at levels not seen since April at around $1.06.