(October 16, 2012) — Equity markets have yet to fully appreciate the impact of the US ‘fiscal cliff’ and have refused to price in its potential effects, industry commentators have warned.
Almost three quarters of respondents to a monthly fund manager survey conducted by Bank of America Merrill Lynch said they did not believe that the fiscal cliff was substantially priced into global equities and macroeconomic data.
The so-called cliff is the point when a wave of taxes that had been temporarily repealed to try and stimulate the global economy, along with a raft of other measures, should come into force adding pressure to the United States’ financial prosperity.
The fiscal cliff is identified as the number one tail risk by 42% of respondents to the survey – up from 35% in September and 26% in August.
Alice Leedale, market strategist at asset manager RWC, said: “As we enter Q4, the big elephant in the room (or a donkey if you are a Democrat) is the US fiscal cliff, but the market has so far been focusing elsewhere. The first October regional manufacturing surveys will be released this week, and continued weakness following September’s disappointments will suggest that the fiscal cliff is not being ignored in this sector of the economy, and is indeed weighing on business sentiment and investment spending.”
While financial markets seemingly carry on regardless, investors have begun to move. Data from market monitor EPFR said that last week US equity funds saw their third successive week of net redemptions.
Europe, however, has become less of a worry for investors. Bank of America Merrill Lynch said a net 27% of the panel saw the Eurozone debt crisis was their number one risk, down from a net 33% a month ago and far lower than 65% in June.
“The outlook for European equities is improving, Eurozone fears are receding and appear largely priced into equity risk premia; core government bonds offer negative real yields so the impetus to rotate into stocks in Europe, as the outlook stabilizes, is profound,” said John Bilton, European investment strategist at Bank of America Merrill Lynch Global Research.