Eurozone fears fade as US fiscal cliff takes centre stage

By:
Duncan Kerr
Published on:

Global investors are now more concerned about the tail risk associated with the US’s so-called fiscal cliff than the eurozone sovereign debt crisis, which for the first time since April 2011 is no longer their chief fear, according to Bank of America Merrill Lynch’s latest fund manager survey.

Some 186 fund managers managing $524 billion of assets globally participated in the survey, with 35% of those responding indicating that US government’s dilemma over balancing spending cuts and tax increases at the end of this year to be the greatest single tail risk, and marginally ahead of the eurozone debt crisis. 
The results mark a dramatic turn around since the last survey in August when a resounding 48% of global investors said the eurozone sovereign debt crisis was their greatest concern. Confirmation on the European Central Bank’s monetary policy intervention earlier this month has seemingly dowsed investors’ fears. 
 
This renewed bullishness reads through into asset allocation as global investors are now overweight eurozone equities for the first time since February 2011. And for the first time since the summer of 2009, the survey has recorded three consecutive months of double-digit positive swings towards European equities.    
 
US equities, by comparison, are less attractive to global investors with a net 58% of respondents indentifying US stocks as the most overvalued globally – up from 51% in August – while 43% said eurozone equities were the most undervalued. This represents the greatest divergence between US and European valuations in the history of the survey, which was first published in 2001. 
 
“We have seen a 25 percent rally in European stocks from the June low, but sentiment on Europe has only just turned positive. Any extension of the rally is likely to be led by sector rotation and buying of unloved, domestically exposed stocks,” says John Biliton, European investment strategist at BofAML. 
   
He added that while there is evidence of some pro-cyclical rotation, European investors remain underweight in several high-beta sectors: notably banks, basic resources, real estate and construction. 

For banks stocks, a net 21% of global investors remain underweight in September – down 14 percentage points month-on-month. According to Biliton, this scaling back of bank underweights was even more pronounced in Europe, albeit from a deeper underweight position. A net 25% of European investors surveyed said they were now underweight banks, down form 43% in August.