Managers respond to the US fiscal drama

February, 2013 Print

Managers respond to the US fiscal drama
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Asset managers have broadly welcomed a last-minute deal which saw the US avoid the fiscal cliff at the start of 2013. However, they have
out that much work remains to be done and much of their reaction to the deal was lukewarm at best.

According to Fidelity Worldwide Investment head of global equities, Richard Lewis, the compromise agreement between Republicans and Democrats was deeply unimpressive, as Democrats wished to keep Bush era tax cuts for 98% of the population, while Republicans wanted to enshrine them for 100%, with both parties settling for 99% in the end. Lewis added: “The issues of the debt ceiling and spending cuts have been left for another day, actually just a few weeks away, when all this partisanship will make headlines once again.”

Most asset managers share the view that an economic crisis induced by the deteriorating credit worthiness of the US is still a threat. Aberdeen Asset Management head of global strategy and asset allocation, Mike Turner, said: “The US deficit remains too high and despite the interest charged being extremely low, action needs to be taken to address the unsustainable growth in federal debt.” Merrill Lynch Wealth Management EMEA chief market strategist, Johan Jooste, said the deal was good, not great, for equities and other risk assets and should help encourage modest gains over the next few months. “Overall, our report card on the fiscal deal is a solid ‘C’ – better than hoped given both parties were struggling to compromise, yet room for much improvement through early 2013,” Jooste said. 

Schroders chief economist and strategist, Keith Wade, said fiscal uncertainty remains and added: “Markets have breathed a sigh of relief with risk assets rallying, suggesting that investors had not been that confident that the politicians would ultimately do the right thing.” Wade went on: “Despite the latest agreement, fiscal uncertainty remains with little progress being made on entitlement reform where Republicans and Democrats remain as divided as ever. Against this backdrop, the fiscal uncertainty which has weighed on longer-term investment decisions is set to persist.” However, a partial deal is a good thing for Neptune Investment Management chief economist, James Dowey, who said: “A common criticism of the deal by commentators is that it does not get the whole job done. That is precisely why we believe that it is a good result for the economy. We know that rapid fiscal contraction when monetary policy is not in a position to provide an expansionary offset can reduce growth in a disproportionately large way. So it is a good thing to reduce the deficit a bit at a time, which is what the deal does.”

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