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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.

Equity markets failing to price in US fiscal cliff

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.

2 comments so far. Why not have your say?

joe stalin

Oct 16, 2012 at 17:52

Yep the next brick in the wall of worry after we have already dealt with Bond market tsunamisand grexit aramageddonn this too will provide lots of angts for the financial media to peddle. Just keep shorting away boys.By now we shoudl have learnt that politicians invariably come to some sense in the nick f time and not before. A compromise will be found as it is always - people seem to forget that the America taxpayer has actuallly mae something out of the rescue of it financial system but thenthey do and did not have Vince Cable did they?

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Frankie Dee

Oct 16, 2012 at 19:51

Absolutlely its a farce u can buy any dog of a share and make money right now with record unemployment during a time the NHS is all but doomed and to cut a long story short the worst time in anyones living memory doctors dont even know if they have a job only safe job lawyer or Solicitor.

It is all to do with Quantatative easing or inventing money or making more debt even today shares went through the roof because Spain is preparing to accept a bailout of sorts its like rejoicing because a country is on its knees the shares will no doubt go up until it takes the cash so BUY BUY BUY.

I can predict right now if Greece either accept more austerity or leave the Euro shares will rise then a bit of profit taking and Italy accept some aid and its BUY BUY again , then we will have slowdown in China douwn a bit then Bank of China Buys Bonds UP UP UP its the easiest job in the world. I am sure if i could watch the markets all day i could make 100K a year easy this is why markets are at record highs its all a farce..

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