Fund managers aren't taking any chances with fiscal cliff 2013 – they're making sure their portfolios are ready now.
That's because global money managers view the looming fiscal cliff as the biggest current threat to investors' profits.
A new Bank of America Merrill Lynch Fund Managers survey this month revealed anxieties about the approaching and almost imminent fiscal cliff, which the country will go over Jan. 1 if Congress doesn't act, now for the first time in 18 months trump fears about the Eurozone sovereign debt crisis.
At the forefront are worries over trillions of dollars of spending cuts set to kick in at the start of next year that will threaten our national security, millions of jobs, and government-funded programs. Those colossal cuts will coincide with the expiration of Bush-era tax cuts which will amount to the biggest ever tax increase on American taxpayers.
The double whammy now has 35% of fund managers citing the fiscal cliff as the biggest danger to investments.
On the flip side, angst over the European debt mess as the top investment worry has waned to 33% from 48%. The drop follows the recent announcement of further support from the European Central Bank and its launch of outright monetary transactions (OMT), or bond buying, to reduce the cost of buying for bordering Eurozone countries.
The figures are from a Sept. 7-13 BofA survey of 253 managers who invest some $681 billion for clients.
Uncertainty surrounding Election 2012 has made the fiscal cliff effect a bigger threat.
"The upcoming election is putting these fears into sharper focus," noted Michael Hartnett, chief investment strategist at Bofa Merrill Lynch Global Research.
But instead of living in fear, you can feel safer by following the same preparation as some of the biggest global money managers.
Fund Managers Prepare for Fiscal Cliff
Since QE3 – or QE Forever, because of the Fed's promise to keep buying bonds until the U.S. economy improves – fund managers have been shifting assets, dumping U.S. equities and moving into the Eurozone region.
There has been a significant improvement in investors' views about the Eurozone crisis, Paul Robinson, a currency strategist at Barclays in London said in a recent report from the bank.
He added that meanwhile "worries about growth prospects in the U.S. have grown significantly."
In September, some 1% of investors were overweight the area, a sharp increase from 12% who were underweight Eurozone stocks the previous month.
This marks the first time in a year-and-a-half that investors are overweight Eurozone equities. The change in sentiment is thanks in part to ECB President Mario Draghi's vow to do "whatever it takes" to rescue and save the euro.
"We have seen a 25% rally in European stocks from the June low, but sentiment on Europe has only just turned positive. Any extension of the rally is likely to be led by sector rotation and buying of unloved, domestically exposed stocks," John Bilton, European Investment Strategist at BofA said in a statement.
Conversely, fund managers have grown increasingly guarded when it comes to U.S. equities. More than half (58%) classify U.S. stocks as overvalued and have reduced their exposure. The percentage that is overweight on the region fell to 11% in September from 13% in August.
Following Fed Chief Ben Bernanke's announcement last week of QE3, stocks rallied, pushing the S&P 500 to its highest level since the end of 2007. The rise gave many fund managers the opportunity to trim holdings and reallocate.
"We believe the time is ripe to move beyond the safe havens of recent quarters. It's time to go back [into Europe] and there is a catch-up game," Didier Duret, chief investment officer at ABN Amro Private Banking told the Financial Times.
European equities look attractive compared to their U.S. equivalents due to "their comparative discount" Duret added.
While the euro has recovered a bit from lows, it's still off from its level a year ago, said John Chatfeild-Roberts, chief investment officer at Jupiter Asset Management. He told the FT he also has a "growing interest" in investing in Europe.
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