US fiscal cliff takes center stage in fund managers’ concerns, BofA Merrill Lynch

Europe is staging a comeback in investor portfolios, while concerns about the US fiscal cliff have taken center stage, BofA Merrill Lynch warned in the bank’s fund manager Survey for September, conducted on 253 panelists with $681bn assets under management.

According to the bank, for the first time since April 2011 the EU sovereign debt crisis is no longer the top tail risk identified by investors, having been surpassed by the US fiscal cliff.

“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.

On the back of this, asset allocators have taken an overweight position in eurozone equities for the first time since February 2011 when the eurozone sovereign crisis deepened.

“A net 1% of global asset allocators are overweight the region compared with a net 12% underweight in August,” the survey found.

For the first time since summer 2009, the survey has recorded three consecutive months of double-digit positive swings towards European equities. A net 9% of global investors say that the eurozone is the region they most want to overweight in the coming 12 months, compared with a net 5 %nominating region as their top prospective underweight in August.

“We have seen a 25% 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,” said John Bilton, European Investment Strategist at BofA Merrill Lynch Global Research.

The proportion of asset allocators overweight US equities has ticked down to a net 11% from a net 13% in August.

Looking ahead, investors appear to see poor value in the US. A net 58% identify US equities as the most overvalued globally (up from 51% a month ago) while a net 43% identify the eurozone as the most undervalued. This represents the greatest divergence between European and US valuations in the history of the survey.

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