US investors braced for 'fiscal cliff' decision

7 November 2012

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.

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