US fiscal cliff biggest investor tail risk concern, says BofA

18 Sep, 2012

Investors view the US fiscal cliff as the biggest tail-risk while concerns over EU sovereign debt appear to be fading, according to a survey of fund managers by Bank of America Merrill Lynch.

According to the survey, 35% of global investors see the US fiscal cliff as their biggest challenge, up from almost a fifth in July 2012. Fears over EU sovereign risk have reduced with 33% of respondents seeing it as the biggest tail-risk, down from 48% in August 2012.

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

Fifty-eight percent of investors view US equities as the most overvalued globally, up from 41% in August. However, the survey was conducted prior to the Fed’s announcement of QE3. “While we expected the Fed to do something, QE3 went beyond our expectations. Had the impact of QE3 been fully visible in the survey, I believe some of the bullish sentiments in the survey would have ticked up further,” commented John Bilton, European investment strategist at BofA Merrill Lynch Global Research.

Asset allocators are taking overweight positions in eurozone equities for the first time since February 2011. A net 1% of global asset allocators are overweight the region compared with a net 12% underweight in August. The survey also recorded three consecutive months of double digit positive swings towards Europe for the first time in three years.

Pessimism about Europe, as a whole, appears to be fading, according to BofA’s Regional Fund Manager Survey. European investors are equally split on whether the region’s economy will strengthen or weaken in the next 12 months whereas a net 23% predicted it would weaken earlier in the summer. The survey added risk appetite was rising too.

“The European Central Bank has done a great job in averting a potential disaster,” commented Bilton. He also said the approval of a European bail-out fund by Germany’s top court would have added to the bullish sentiment on Europe had it occurred prior to the completion of the survey.

Bank of America Merrill LynchequitiesEuropean Central BankeurozoneFederal ReserveQE3sovereign risk