Money managers are reducing U.S. equity holdings amid expectations of a U.S. rate hike, said Bank of America Merrill Lynch's monthly fund manager survey.
Thirty-four percent of respondents expect the Federal Reserve to raise rates in the second quarter, up from 28% last month. Forty-one percent of managers expect a rate hike in Q3.
Accordingly, a net 19% of respondents reported being underweight U.S. equities, the highest reading since January 2008 and down from a net 6% overweight in February. A net 23% of respondents now consider the asset class overvalued, the highest reading since May 2000, and a net 35% want to underweight the asset class, the highest reading in nearly 10 years.
Managers' allocations to emerging markets equities also decreased in March. A net 11% of respondents reported being underweight the asset class compared to a net 1% underweight last month. A net 57% of respondents also said global emerging markets equities is the asset class they would most like to underweight in the next 12 months.
On the other hand, managers' outlooks on Europe and Japan are improving.
A net 60% and 40% of managers reported being overweight eurozone and Japanese equities, respectively, up from a net 55% and 35%, last month. Also, a net 38% expect double-digit earnings growth in Europe in the next year, up from a net 3% in February and a net -43% in January and a net 63% of managers want to overweight the region in the next 12 months.
“Investor consensus suggests that the strong dollar will act as a positive rather than a negative for the global economy and markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release on the survey results.
“Bullishness toward 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,” added Manish Kabra, European equity and quantitative strategist, in the news release.
The survey of 207 managers with a total of $565 billion in assets under management was conducted March 6-12.