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Manager survey: Global optimism remains; U.S. fiscal cliff still biggest worry

A resolution should be reached on the fiscal cliff, but the big risk is protracted disagreement after the elections.

Money managers are showing continued optimism in the global economy and equity performance, but the looming U.S. fiscal cliff was viewed as the top tail risk for a second month in a row, according to the Bank of America Merrill Lynch October Survey of Fund Managers.

Forty-two percent of respondents said the fiscal cliff was the No. 1 tail risk, up from 35% in September, compared to 27% that listed the eurozone debt crisis, which was down from 33% last month and 65% in June.

Seventy-two percent said the fiscal cliff is not substantially priced into global equities and macroeconomic data.

The European debt crisis had been the top risk most of this year, but the risk has dropped with respondents after policymakers came up with funding plans to restore confidence, said Kate Moore, senior global equity strategist.

“We need U.S. politicians to do the same,” Ms. Moore said in a telephone interview. “Politicians need to step up and say 'we have a plan' and remove the uncertainty hanging over the markets.”

Ms. Moore said there is an expectation that a resolution will be reached on the fiscal cliff, but the big risk is a protracted period of disagreement after the elections. There are opportunities for investors to take on more risk right now, but they have a cautious “wait-and-see attitude,” she added.

Respondents are more positive on the global economy, except for Japan, according to the survey. A net 20% said the global economy will strengthen in the coming 12 months, up from 17% in September, and a net 24% of asset allocators are overweight equities, up nine percentage points. Money managers are also not as down on corporate earnings with a net 11% expecting a drop in profits in the next year, down from 28% last month.

The gap between investors being overweight in the U.S. and Europe is now even, at a net 10% each. In September, a net 13% were overweight U.S. and 13% underweight Europe. It is the first time since April 2011 that respondents have been overweight on European equities and the highest since February 2011.

However, respondents are becoming increasingly bearish on Japan, with a net 38% underweight on Japanese equities, the lowest reading since March 2009.

Investors are shifting toward higher risk sectors with their increased equity allocations, including industrials, banks, insurance and materials.

A total of 269 money managers with $734 billion in assets under management participated in the survey Oct. 5-11.