A majority of global money managers expect the Federal Reserve to raise rates three or more times over the next year, said Bank of America Merrill Lynch's latest monthly fund manager survey.
A net 58% of respondents said they expect three or more rate hikes in the next 12 months.
The survey also found managers are increasing their cash holdings ahead of this week's Federal Open Markets Committee meeting. Average cash holdings rose to 5.2% of managers' portfolios, up from 4.9% last month, according to BofA Merrill Lynch.
The December survey also found reduced confidence in China's economy. A net 43% of managers now expect that economy to weaken over the next 12 months, up from a net 4% last month. A potential Chinese recession is still viewed as the biggest tail risk by survey respondents, followed by geopolitics and an emerging markets debt crisis.
Regarding asset allocation, managers' allocations to global equities remained relatively unchanged at 42% (vs. 43% last month), while bond and commodity allocations dropped to two- and three-month lows, respectively. A net 64% and 29% of managers now report being underweight bonds and commodities, respectively, compared to a net 59% and 23% last month.
Within equity, allocations to U.S. and U.K. equities decreased while Japan increased. A net 19% and 21% of managers now report being underweight U.S. and U.K. equities, respectively, compared to a net 6% and 15% in November. December's U.S. equity reading is the highest underweight in eight years. At the same time, a net 37% reported being overweight Japanese equities, up from a net 28% last month. Managers remain confident in eurozone equities with a net 55% reporting being overweight to the region compared to a net 58% last month.
“The strong dollar view is writ large across all asset, regional and sector allocations. It will take a very dovish Fed and weak U.S. earnings to reverse the strong dollar view in 2016,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, in a news release.
This month 53% of survey respondents said long U.S. dollar is the “most crowded trade,” up from 32% in November.
The survey of 215 money managers representing $620 billion in assets under management was conducted Dec. 4-10.