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Fearing Rate Hike, Global Investors Flee U.S. Stocks

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Global investors, expecting a second-quarter rate hike by the U.S. Federal Reserve, have significantly reduced their U.S. equity allocations, according to Bank of America Merrill Lynch’s March fund manager survey.

The survey results, released Tuesday, indicated that 19% of global asset allocators were underweight U.S. equities — the biggest underweight since January 2008 and a wide swing from 6% overweight in February.

The proportion of investors saying U.S. equities were overvalued reached its highest level since May 2000, 23%.

An overall total of 207 panelists with $565 billion of assets under management participated in the global and regional surveys conducted in early March by BofA Merrill Lynch and the market research company TNS.

The survey found that allocations to Eurozone and Japanese equities had both increased, with investors indicating that the shift to Europe had only just begun.

Sixty-three percent of respondents said Europe was the region they most wanted to overweight in the coming 12 months — a record since the question was first asked 14 years ago, BofA Merrill Lynch said in a statement.

The reading had shot up from a net 18% preferring Europe in January.

According to the survey, the move out of U.S. equities was also set to continue. Thirty-five percent of respondents said they wanted to underweight the U.S. — the most bearish reading in nearly a decade.

The spread between Europe and the U.S. has soared to 98 net percentage points — also a record, BofA Merrill Lynch reported.

The March survey indicated that investors had begun to bring forward the date of the Fed’s first rate hike. The proportion of investors expecting the Fed to raise rates in the second quarter rose to 34%, from 28% in February, and the number expecting a rate rise in the third quarter fell.

Accordingly, a net 2% of the panel said the U.S. dollar was 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,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research, said in the statement.

Inflation, Rate Expectations Spike

Fifty-two percent of panelists expected high global consumer price inflation this month, up from 29% in February and 14% in January.

Furthermore, increasing numbers believed global monetary policy could tighten, as 34% said policy was currently too stimulative, up from a net 26% a month ago.

More investors forecast increases in both long- and short-term interest rates.

Sixty-six percent of respondents believed three-month rates would be higher in 12 months’ time, up from 53% in February, and 63% expected higher 10-year rates in 12 months, up from 57%.

European Bulls, Chinese Risk

Investors inside Europe are also bullish, making big allocations to financial services. The proportion of European investors overweight in bank stocks surged to 22% in March, from 26% underweight last month.

The proportion of investors overweight insurance has risen to 31%, from 3% underweight in February

Thirty-eight percent of investors in the regional survey said they expected double-digit earnings growth in Europe in the next 12 months, up from just 3% in February and negative 43% in January. Eighty-eight percent of the regional panel said Europe’s economy would be stronger in a year’s time, up from 81% a month ago.

“Bullishness towards European stocks has reached uncharted territory,” Manish Kabra, European equity and quantitative strategist at BofA Merrill Lynch, said in the statement.

“Demand for financials highlights confidence in domestic growth, while belief in European exporters is building on gains seen last month.”

Concerns about China debt defaults were top of mind for many global investors, and were now seen the second-largest tail risk in world markets—19% of investors ranked it as their greatest risk, compared with 14% a month ago.

“Geopolitical crisis” remained the most voted for tail risk.

Further, the proportion of asset allocators underweight global emerging markets rose to a net 11% in the March survey from a net 1% in the past month.

Fifty-seven percent of the global panel said global emerging markets was the regional asset class they most wanted to underweight in the coming 12 months — down from a net 63%, but still close to historic survey highs, according to BofA Merrill Lynch.

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