U.S. Fiscal Cliff Replaces EU Risk as Top Global Concern
Europe is staging a comeback in investor portfolios while concerns about the U.S. fiscal cliff have taken center stage, according to the BofA Merrill Lynch Fund Manager Survey for September.
The EU sovereign debt crisis is no longer the top tail risk identified by investors, for the first time since April 2011, having been surpassed by the U.S. fiscal cliff. The proportion of the panel that most fear EU sovereign risk fell to 33% from 48% in August. The U.S. fiscal cliff has become the biggest tail risk for 35% of global investors. “Investors now view the U.S. fiscal cliff as a greater threat than the euro-zone – and the upcoming election is putting these fears into sharper focus,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.
Asset allocators have taken an overweight position in euro-zone equities for the first time since February 2011 when the euro-zone sovereign crisis deepened. A net 1% of global asset allocators are overweight the region compared with a net 12% underweight in August. 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 euro-zone 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.
Pessimism within Europe is fading, according to the Regional Fund Manager Survey. European investors are equally split on whether region’s economy will strengthen or weaken in the next 12 months – whereas in August a net 23% said it would weaken. Risk appetite is rising. European investors have begun to put cash to work, raising allocations on 12 out of 19 European sectors.
“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.
As Europe becomes less unloved, investors appear to be moderating their bullish view of U.S. equities and have turned more bearish on Japan. The proportion of asset allocators overweight U.S. equities has ticked down to a net 11% from a net 13% in August. Looking ahead, investors appear to see poor value in the U.S. A net 58% identify U.S. equities as the most overvalued globally (up from 51% a month ago) while a net 43% identify the euro-zone as the most undervalued. This represents the greatest divergence between European and U.S. valuations in the history of the survey.
While investors moderately reduced their underweight positions in Japanese equities, this month’s survey suggests sentiment is turning more bearish. A net 23% of asset allocators are now underweight Japanese equities, a small improvement from a net 25%. But a net 24% of investors say Japan is the region they most want to underweight – double the level expressing that view in August.
In a month when global economic sentiment continued to rise, profit expectations have continued to fall. A net 17% of the global panel expects the world economy to strengthen in the coming 12 months, a rise of two percentage points since August, consolidating the strong gains the previous month.
However, a net 28% believe corporate profits will deteriorate over the same period, up from a net 21% a month ago. Investors are growing impatient about low levels of investment. A growing majority – a net 59% – says that corporates are underinvesting, up from 54% in August. A net 41% of investors believe corporates should increase capital spending, an increase from a net 33% in August.
While there is evidence of some pro-cyclical rotation, European investors remain underweight in several higher-beta sectors; notably banks, basic resources, real estate and construction. At the global level, a net 21% remains underweight banks this month, down 14 percentage points month-on-month. The scaling back of bank underweights was even more pronounced in Europe, albeit from a deeper underweight position. A net 25% of the European panel is now underweight banks, down from a net 43% in August.
An overall total of 253 panelists with US$681 billion of assets under management participated in the survey from 7 September to 13 September. A total of 186 managers, managing US$524 billion, participated in the global survey. A total of 138 managers, managing US$313 billion, participated in the regional surveys. The survey was conducted by BofA Merrill Lynch Research with the help of market research company TNS. Through its international network in more than 50 countries, TNS provides market information services in over 80 countries to national and multi-national organizations. It is ranked as the fourth-largest market information group in the world.