Fund managers alarmed by US ‘fiscal cliff’

Posted on July 17, 2012

Nearly one in five fund managers view the US “fiscal cliff” as a greater cause for alarm than the eurozone crisis, underpinning fears that debt gridlock could slow the world’s biggest economy.

The finding, from the latest BofA Merrill Lynch fund manager survey, came a day after the International Monetary Fund warned of the looming risks associated with the US fiscal cliff – huge tax rises and spending cuts that are set to kick in next year.

    The survey showed investor confidence in US equities fell steeply in July, with the number of managers who were overweight in the asset class more than halving to a net 14 per cent in July.

    Of concern among investors is a set of binding US budget cuts worth $600bn which will come into effect if Congress fails to pass new legislation by the end of the year.

    Political posturing and a lack of bipartisan effort to agree on a resolution has put US equities under pressure, said Ralph Bassett, deputy head of North American equities at Aberdeen Asset Management.

    “These issues combined are continuing to brew uncertainty and as such we anticipate that the pace of growth will remain volatile and expect business leaders to remain somewhat tentative,” he added.

    While European stocks remained out of favour, investors have “recalibrated” their underweight positions slightly “at the expense of US equities,” said Gary Baker, head of European equity strategy at BofA Merrill Lynch.

    More broadly, confidence was being buffeted by a “severely” deteriorating outlook for corporate profits.

    Conviction that companies could increase profits fell to the lowest point since the spring of 2009, highlighting concerns about the US earnings season, which started last week.

    In the spring, US companies began to warn shareholders that their results would be lower than expected.

    These warnings appear to have affected sentiment as fund managers lowered their expectations for corporate profits and operating margins in July.

    Nearly three quarters of those surveyed said they anticipated corporate profit growth will fall below 10 per cent this year, while a majority thought operating margins would fall.

    This has added to confusion among investors about where to put their money. In the US, the number of investors overweight in technology stocks, traditionally a favoured sector, nearly halved in July to 22 per cent.

    In Europe, managers rated just four sectors overweight, the lowest number in six years. Among those, the oil and gas sector saw a slight uptick in sentiment compared with June, while investors held on to investments in the healthcare, insurance and technology sectors.

    Meanwhile, the majority of investors surveyed continued to expect central bank easing from the European Central Bank or the US Federal Reserve.

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