Bloomberg News

European Stock Holdings Surge on U.S. Fiscal-Cliff Risks

October 16, 2012

European stock holdings climbed to a 20-month high as the so-called U.S. fiscal cliff became a bigger concern for investors than the euro-region debt crisis for a second month, a Bank of America Corp. survey showed.

A net 10 percent of money managers, who together oversee $561 billion, are now overweight euro-area equities, according to the survey. Some 42 percent of respondent said impending U.S. budgetary tightening was the largest risk for their investment strategies, compared with 27 percent who named the euro-region crisis as their top fear.

The U.S. faces $600 billion of tax increases and spending cuts that will kick in automatically at the end of the year unless Congress agrees on how to reduce the federal budget deficit. The International Monetary Fund’s Christine Lagarde warned this month that the world’s largest economy may tumble into a recession in 2013 if lawmakers fail to strike a deal.

“The fiscal cliff dominates the euro debt crisis,” John Bilton, European investment strategist at Bank of America’s Merrill Lynch unit, said at a press conference in London today. “Until we see that tail risk recede, it’s going to be difficult for investors to feel that they can go all-in. It’s certainly holding investors back.”

In September, 35 percent of survey respondents rated America’s budget outlook as their top concern, compared with 33 percent who cited the euro-area crisis. That was the first time since April 2011 that the European situation wasn’t the foremost fear among investors. Only one in five survey respondents this month said the outlook for American tax increases and spending cuts has been priced into stocks.

Cliff Concern

Even as concern about the fiscal cliff climbed, total allocations to equities and commodities both advanced to six- month highs this month, driven by an increase in global growth expectations. A net 24 percent of respondents said they are overweight global equities while 5 percent are overweight basic resources. A net 20 percent expect the global economy to strengthen, up from 17 percent last month.

Global investors cut their holdings in U.S equities in October for a fourth straight month, moving funds into European shares, the survey showed. A net 10 percent of fund managers were overweight American stocks, meaning they hold more of the region’s shares than are represented in global benchmarks, down from 31 percent in June.

The allocation in euro-area stocks climbed from 1 percent in September as European Central Bank policy makers agreed on an unlimited bond-buying program last month. European stock holdings in October matched those in the U.S. for the first time in two years, according to the report.

Equity Valuations

“Investors like Europe a little bit more, they are buying Europe a little bit more, but they are a long way from being as enthusiastic as valuations would currently suggest they would be,” Bilton told journalists at the briefing. “We’ve seen a stabilization in Europe as opposed to an improvement.”

The Stoxx Europe 600 Index (SXXP) is trading at 12.1 times its companies’ projected earnings, near the most expensive since December 2010, according to data compiled by Bloomberg.

Elsewhere, investors reduced their underweight holdings in U.K. stocks to 6 percent, the least bearish in almost two years. They increased their allocation in emerging markets to 32 percent overweight in October from 19 percent last month. Holdings in Japan dropped to 38 percent underweight, the lowest since March 2009.

Two hundred respondents participated in the survey which was conducted from Oct. 5 to Oct. 11

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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