So American voters have had their big day at the elections and nothing much has changed. President Barak Obama is still ensconced in The Whitehouse and the US and the world still face the same economic problems.
The key themes dogging investors after Obama’s second term victory are fiscal uncertainty and the nation’s monetary status quo.
The Federal Reserve is likely to stick to a 0% interest rate policy and large scale quantitative easing.
Looking in to 2013, the fiscal cliff is the big issue. The potential crisis is nearly every tax cut since 2001 ending in January, which could raise the average US household’s tax burden by $3,500 a year and wipe out $110 billion of spending cuts over the next decade.
The knock on effect is this will offset the benefit of GDP growth of an expected 2% – 2.5%.
However, more likely is Obama is leveraging his re-election to edge hostile Republicans in Congress to accept a negotiated settlement to reduce the deficit with cuts while maintain at least some of the threatened tax cuts.
Although the phone lines may be melting as the government tries to hammer out some tough deals, investors need to consider their next moves.
Investment fund managers Schroder’s has looked at the equities and fixed income views.
Joanna Shatney, who heads US Large Cap Equities feels Obama does not have same political capital as when he entered his first term.
The biggest difference is that the Republicans have retained control of the House of Representatives.
When Obama won in 2008 it was Democrat controlled.
“We believe that there will be a compromise reached before year end to push the deadlines out on the $600 billion of tightening which is currently scheduled for the New Year. There does seem to be some agreement on extending Bush’s tax cuts, which represent a significant portion of the fiscal cliff, for the short term until greater tax overhaul is discussed,” she said.
“We expect a positive year for the equity market in 2013. Equity valuations remain attractive – particularly compared to US bonds. High yield, high risk bonds are more expensive than equities. The question is when will we see the catalyst which makes investors take advantage of this value?
While we saw strong outperformance from equities in the third quarter, I think this would need to persist for a good deal longer: there is always something of a herd mentality about moving from one asset class to another.
David Harris, head of Schroder’s US Multi-Sector Fixed Income: “A nearly equal split of the popular vote means there is not a clear mandate for Obama, despite the larger-than-expected margin of victory in the electoral vote. The loss of several moderate figures from the House and Senate arguably polarises government even more.
“While Obama’s post-election speech was reconciliatory, it will be difficult to achieve an agreement that includes higher taxes. Increasing taxes in any form is a virtual death sentence for Republicans seeking future re-election. Higher tax rates may be possible in the future but only with an income threshold above the currently proposed $250,000 level and with substantial offsets that will take time to negotiate.”