What the US fiscal cliff 'deal' will mean for investors02 January 2013
Bestinvest’s Jason Hollands reveals what the US fiscal cliff “deal” will mean for investors
Back in October we said that whoever won the US elections, “a deal (to address the “fiscal cliff”) will ultimately happen: probably by reinstating Bush-era tax cuts”. Indeed this appeared to be what the market expected at that time.
Roll on a couple of months after some hair raising brinksmanship between the Republicans and Democrats, a deal of sorts has been approved by the US Senate and House of Representatives broadly as expected and on face value a lot like the outcome modelled by the Congressional Budget Office earlier in the year. This will see the Bush-era tax cuts retained for the vast majority of Americans and increases restricted only to those earning more than $400,000 per annum which represents a compromise from both sides of America’s political divide.
The deal reached is not a full resolution of the “fiscal cliff” as it fundamentally addresses one side of the equation: the extent of tax rises. Decisions over the depth of spending cuts have been deferred for reasons of pragmatism to provide more time to reach an agreement. In our view sizeable cuts in spending programmes are inevitable, with greater clarity to come in the months ahead.
So while the deal isn’t a comprehensive “grand bargain”, in our view it represents an important step forward and should put to rest those fears of a doomsday scenario. By averting widespread tax hikes, we don’t expect the recovery to be de-railed.
More importantly, it to a large degree removes another short term cause of uncertainty that has dented both business and market confidence. Many US businesses have held back on decision making over the last year, with North American M&A down around a quarter over the previous year. More confidence in the US should be supportive to market globally.
Although the outlook for growth across much of the developed world remains weak, our our view is that equities generally look attractively valued both relative to bonds and their long-term trends. Step by step, we have seen a number of uncertainties removed (US elections, Chinese leadership transition) and a more proactive approach from central banks both in Europe and the US. The combination of cheap equity valuations, attractive dividend yields and gradually improving market confidence should be supportive for equities in 2013 and beyond with our favoured markets being core Europe and Global Emerging Markets.”
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