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Investors cut US equity exposure to lowest since January '08: survey

[LONDON] International investors slashed their exposure to US equities in May to its lowest in over seven years, while maintaining the euro zone as their leading stock market destination, a closely watched survey said on Tuesday.

Driven by worries about a string of disappointing US economic indicators and the strength of the dollar, global investors cut their allocation to US stocks to 19 per cent underweight from 12 per cent underweight the month before.

That's according to the monthly Bank of America Merrill Lynch survey of 169 fund managers who run US$479 billion of funds, which was conducted May 8-15, and comes just as the S&P 500 hits record highs. "Relative positioning of the US vs the rest of the world is now at the most extreme since November 2007," BAML said in its report. "Contrarians would go long US equities relative to the broader market."

While 70 per cent of respondents expect global growth to strengthen and the rise in oil has pushed inflation expectations to a 10-month high, expectations for the first US interest rate increase have been pushed back.

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More than half of those polled now expect the first Federal Reserve rate hike since June 2006 to come in the fourth quarter of this year or later.

Meanwhile, a net 49 per cent of those surveyed were overweight euro zone stocks in May, up from 45 per cent in April. Only one in 10 managers polled was underweight euro zone stocks. "Positioning in euro zone equities remains crowded," BAML said in its report.

Overall, investors reduced their global equity allocation to a net 47 per cent overweight, the lowest in six months. Global bond allocations were cut to a net 60 per cent underweight, the lowest in nine months, as the global bond rout of April and May took hold.

While both equities and bonds may be richly valued, investors think the biggest risk of volatility this year is in bonds. Only 5 per cent of those surveyed said they expected bond yields to fall this year.

With crude surging some 50 per cent from a January low, only a net 13 per cent of investors thought oil was undervalued, the lowest percentage in eight months.

Demand for safe-haven cash slipped to a still "elevated" 4.5 per cent in May from 4.6 per cent in April. Cash levels above 4.5 per cent are a contrarian "buy" signal for equities, and below 3.5 per cent triggers a "sell" signal, BAML said.