Global investors have significantly pared back US equity allocations as belief grows that the US Federal Reserve will raise rates in the second quarter, according to the BofA Merrill Lynch Fund Manager Survey for March.
A net 19% of global asset allocators are now underweight US equities – the biggest underweight since January 2008 and a big swing from a net 6% overweight in February. The proportion of investors saying US equities are overvalued has reached its highest since May 2000 at a net 23%.
Allocations to eurozone and Japanese equities have both increased, but investors have indicated that the shift to Europe has only just begun. A net 63% of respondents say that Europe is the region they would most like to overweight in the coming 12 months – a record since the question was first asked in 2001. The reading has spiked from a net 18% preferring Europe in January.
The move out of US equities is also set to continue. A net 35% say that the US is the region they would like to underweight the most, the most bearish reading in nearly 10 years. The spread between Europe and the US has soared to 98 net percentage points – also a record.
Investors inside Europe have echoed their global colleagues’ bullishness towards the region and made big allocations towards financial services. The proportion of European investors overweight banks has surged to a net 22%, from a net 26% underweight last month. The proportion of investors overweight insurance has risen to a net 31%, from a net 3% underweight in February.
Belief in a rebound in profits is strong, the report also highlighted. A net 38% of respondents to the regional survey say that they expect double-digit earnings growth in Europe in the next 12 months, up from just 3% in February and negative net 43% in January.
With questions hanging over China’s debt levels, concern of default has moved to the forefront of more investors’ minds. China debt defaults is now seen the second-largest tail risk in world markets – 19% of investors rank it as their greatest risk, compared with 14 percent a month ago, BofA also reported.
Furthermore, the proportion of asset allocators underweight global emerging markets has risen to a net 11% from a net 1% in the past month. A net 57% of the global panel say that global emerging markets is the regional asset class they most want to underweight in the coming 12 months – down from a net 63 percent but remaining close to historic survey highs.
“Investor consensus suggests that the strong dollar will act as positive rather than a negative for the global economy and markets,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research. “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.