More Concerning to Investors than the Euro Crisis

Laura Joszt

For a year and a half investors have had their eyes on Europe with the debt crisis ranking as the biggest concern. But there's a new issue in town: the U.S fiscal cliff.

For a year and a half investors have had their eyes on Europe with the debt crisis ranking as the biggest concern. But there’s a new issue in town: the U.S fiscal cliff.

According to the Bank of America (BofA) Merrill Lynch Fund Manager Survey for September, the U.S. fiscal cliff has surpassed the European Union (EU) sovereign debt crisis as the top tail risk identified by investors. Last month nearly half (48%) of those surveyed feared the EU debt crisis most, but right now that number dropped to 33%.

The U.S. fiscal cliff concerns 35% of global investors, according to the survey of 253 panelists with $681 billion of assets under their management.

“Investors now view the U.S. fiscal cliff as a greater threat than the eurozone — and the upcoming election is putting these fears into sharper focus,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

The U.S. will face the so-called “fiscal cliff” at the end of 2012. At that time lawmakers will have to decide if they’ll let the 2013 tax increases go into effect — which could drive the economy back into recession — or if they’ll cancel those increases and spending cuts, thus adding to the deficit and increasing the odds that the U.S. will face a deficit crisis of its own.

Since February 2011, asset allocators have been taking underweight positions in eurozone equities. According to the survey, 9% of global investors say that the eurozone is the region they most want to overweight in the coming months.

“We have seen a 25% rally in European stocks from the June low, but sentiment on Europe has only just turned positive,” said John Bilton, European investment strategist at BofA Merrill Lynch Global Research. “Any extension of the rally is likely to be led by sector rotation and buying of unloved, domestically exposed stocks.”

More than half (58%) identify U.S. equities as the most overvalued globally — up 51% from last month — while 43% say the eurozone is the most undervalued.

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