Investors cut U.S. equity holdings to eight-year low: BAML poll

LONDON (Reuters) - Investors have cut their U.S. equity allocation to an 8-year low, reducing risk ahead of the U.S. Fed’s December meeting as worries about the impact of a rate rise have mounted, a Bank of America Merrill Lynch (BAML) survey showed on Tuesday.

Fund managers reduced their U.S. equity holdings to a net 19 percent underweight from a net 6 percent underweight the previous month, and raised their cash allocation to 5.2 percent from 4.9 percent, the bank’s survey for December found.

Investors have been taking risk off the table ahead of the U.S. Federal Reserve’s Dec. 16 meeting, at which it is expected to raise interest rates for the first time since 2006.

Market focus is now switching to the pace of tightening in 2016, with some 58 percent of respondents expecting the Fed to raise rates three times or more in the coming 12 months.

BAML noted a big jump in the percentage of respondents saying corporate bonds were most vulnerable to the Fed tightening cycle, at 24 percent, up from 13 percent last month.

And some 53 percent cited long U.S. dollar as the most crowded trade, up from 32 percent in November.

“The strong dollar view is writ large across all asset, regional and sector allocations,” said Michael Hartnett, chief investment strategist at BAML Global Research. “It will take a very dovish Fed and weak U.S. earnings to reverse [this] in 2016.”

Worries about a slowdown in China have also intensified, with the projection for China’s GDP growth in three years’ time falling to 5.5 percent from 5.9 percent last month.

Beijing has been struggling to reach its economic growth target of around 7 percent this year, despite a raft of measures to ease monetary policy. The yuan has weakened against the dollar over the past week to four-and-a-half year lows.

A Chinese recession remained the biggest tail risk, chosen by 34 percent of survey respondents, followed by a geopolitical crisis, picked by 19 percent, and an emerging market debt crisis cited by 18 percent.

Investors have started to rotate out of growth stocks such as technology and discretionary and into more defensive value plays such as utilities and insurance stocks.

BAML noted that the month-on-month drop in tech holdings was the biggest since January 2008, while the month-on-month rise in utilities holdings was the largest since September 2010. The allocation to utilities is now at a 13-month high.

The overall allocation to equities was little changed from the previous month but the UK equity allocation fell to a net 21 percent underweight whilst Japanese equity holdings rose to a net 37 percent overweight.

BAML noted that the allocation to emerging markets was at a five-month high, although this was still a net 27 percent underweight. Investors also remained wary of commodities, with holdings at a three-month low.

The survey was conducted between Dec. 4-10, amongst some 215 participants with $620 billion under management.

Reporting by Claire Milhench; Editing by Lisa Barrington