What Eurozone Crisis? Investors Turn on the US

(September 19, 2012) — Investors are more concerned with economic events in the United States than the Eurozone crisis for the first time in almost 18 months, and the presidential election is causing increased concern.

In September, investors considered the US fiscal cliff as the top tail risk to their portfolio. This concern overtook worries about the Eurozone that had sat atop the list since April 2011, according to a survey from Bank of America Merrill Lynch (BoA Merrill Lynch).

The proportion of the panel responding to the survey that cited the Eurozone as their biggest threat fell from 48% in August to 33% this month.

“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 Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

The fiscal cliff is looming into view at the end of the year and US politicians have to decide how to tackle the large budget deficit. This is likely to mean changes to the tax regime that could slow down the US economy and even put it into recession.

Following positive movements by the European Central Bank and agreement (at least on the surface) by Eurozone leaders, asset allocators have taken their first overweight position in Eurozone equities for the first time since February 2011, the survey revealed. For the first time since the summer of 2009, the survey recorded three consecutive months of double digit positive swings toward European equities.

A net 58% of investors considered US equities to be the most overvalued and as a result they reduced their overweight positions over the past month.

However, the greatest bearishness was reserved for Japanese equities. Almost a net quarter of asset allocators are underweight the asset class. Double the number of investors now say they want to be underweight the country’s stock market compared to the number of investors feeling that way in August.

This morning, the Bank of Japan continued its action to weaken its currency against the US dollar as a strong yen hurts manufacturers exporting their goods. The action was similar to the third round of quantitative easing announced by the US Federal reserve last week. In a news conference after the announcement, Bank of Japan Governor Masaaki Shirakawa said: “Overseas economies are slowing more than we anticipated, which is why we downgraded Japan’s economic view. Japan’s economic recovery could be delayed by about half a year.”

However, this morning there had been no major movement by the yen on currency market although the domestic stock markets had risen on the news.