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Equity markets failing to price in US fiscal cliff
US tax hikes and spending cuts are a bigger threat to markets than the eurozone debt crisis, say investors.
Stock markets have failed to price in the possible impact of the looming US fiscal cliff, according to a survey of investors.
The so-called fiscal cliff could hit shares after the US elections, when policymakers will have a matter of weeks to prevent drastic automatic tax increases and spending cuts coming into force and raise the US federal debt ceiling.
If politicians fail to agree on a solution before January the planned tax hikes could knock 0.5% off the country’s forecast GDP growth for 2013, tipping the country back into recession in the first quarter.
Of 269 fund managers surveyed by Bank of America Merrill Lynch between 5 to 11 October, 72% believe the fiscal cliff isn’t priced into equities and macroeconomic data. The scale of its possible impact means the fiscal cliff is now identified as the biggest concern for investors, and 42% identified it as the greatest tail-risk in the market, ahead of the eurozone debt crisis, which 27% see as the number one risk to investment.
The findings align with the worries expressed by chief investment strategist at iShares, Russ Koesterich, last week.
Koesterich said: ‘The market tends to focus on the shark that’s closest to the boat. For the next three months, arguably the US, not Europe, represents the big threat in the form of the fiscal cliff… the market is not prepared for this.’
However, the outlook for global growth has also improved and 20% of investors now believe the world economy will improve in the coming year.
Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch Global Research, said: ‘While the US fiscal cliff is a hurdle, growing belief in the global economy could spur a more "risk on" stance from investors.’
The change in sentiment has already lead fund managers to invest in more high-risk sectors over the past month.
A net 7% of investors are now overweight industrials, compared with a net 8% underweight the sector in September. Managers also bought back into banks, insurance and materials and a net 18% believe banks are the most undervalued sector.
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