US investors braced for 'fiscal cliff' decision
While the FTSE 100 surged to its highest level since mid-October this week following Barack Obama's re-election as US President, experts warn the way he and Congress decide to deal with the so-called 'fiscal cliff' could have a big impact on US equities.
Gavin Haynes, managing director of Whitechurch Securities, says Obama being re-elected may make it more difficult to reach a budget compromise with Congress in order to avoid the fiscal cliff – a combination of higher taxes and government spending cuts to the tune of $600 billion (£375 billion) that will be automatically implemented unless Congress acts by 1 January.
In Tuesday's election the Democrats retained their majority in the Senate, which they have held since 2007, but the Republicans also kept control of the House of Representatives.
"As a result the short-term outlook for US equities remains concerning," he adds.
Echoing his warning, Patrick Connolly, spokesperson for AWD Chase de Vere, cautions that US investors could have "a very rocky road ahead" if there is a political deadlock between the Senate and House of Representatives.
Indeed, if nothing gets agreed by midnight on 31 December, more than 1,000 government programmes are in line for automatic cuts, including the end of temporary payroll tax cuts which means all US workers will see a 2% tax increase.
Andy Gadd, head of research at Lighthouse Group, explains: "It is anticipated that, as the changes stand, they would reduce US GDP in 2013 by approximately 4% and lift the US unemployment rate by 1% (two million jobs)."
Gadd believes Obama and Congress will opt for an approach that would address the budget issues to a limited extent, but would have a more modest impact on growth.
"The non-partisan Congressional Budget Office estimates that if the Bush-era tax cuts are extended and the automatic spending cuts are cancelled the result, in the short term, would be modest growth but no major economic hit," he adds.
But while the sector certainly isn't without risk, in particular leading up until the end of the year, advisers still believe there are some compelling arguments for investing in the US.
Haynes predicts volatility in the US market for the remainder of the year, but says: "US equities look to be in reasonable shape for 2013. There are clear signs of economic recovery. The US economy has now experienced 25 consecutive months of jobs growth, while the housing market is showing clear signs of turning around."
He adds: "Corporate America is generally in rude health. We believe an exposure to this market is essential in a well-diversified equity portfolio, and now is not the time for clients to ignore it. 15% is a reasonable weighting within a UK investors equity portfolio," he says.
The total money value of all the finished goods and services produced in an economy in one year. It includes all consumer and government consumption, government spending and borrowing, investments and exports (minus imports) and is taken as a guide to a nation’s economic health and financial well being. However, some economists feel GDP is inaccurate because it fails to measure the changes in a nation's standard of living, unpaid labour, savings and inflationary price changes (such as housing booms and stockmarket increases).
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).