The US fiscal deal digested – investment experts give their view

3rd January 2013

 

Fund managers and economists have now crunched the numbers on the fiscal cliff deal. We bring you a sample of their comments on what the deal on taxes and of course the lack of a deal on spending means for the US economy and investment prospects in America and elsewhere. 

Keith Wade, chief economist, Schroders – End of payroll tax cut will hit many families.

“Higher taxes on the wealthy will not make a significant dent in consumption as they are likely to be largely met through lower saving. Despite the protestations of many Republicans, it is also difficult to see how an increase in the top rate of income tax from 35% to 39.6% will stifle American enterprise. However, the decision to allow the 2% payroll tax cut to expire will hit many families and is set to raise $95billion, about 0.6% GDP.

“When combined with other measures such as higher dividends, capital gains taxes and the temporarily delayed spending cuts, we are looking at a 2013 fiscal tightening of about $160 billion or 1% GDP. Whilst marginally less than we had factored into our forecast, the scope for upside risk to our 1.9% US GDP growth forecast for 2013 is limited.

“Lifting the debt ceiling by end February/ early March and then going on to strike a longer term deal – a grand bargain – promises to be a major challenge. Against this backdrop, the fiscal uncertainty which has weighed on longer-term investment decisions is set to persist. We believe this will weigh on growth as spending on durable goods and capital equipment is held back.”

Didier Saint Georges, member of the investment committee of Carmignac Gestion – Will the agreement trigger an upturn in the industrial investment cycle?

“A key question for investors remains whether the scope of this agreement is large enough to trigger the long-awaited upturn in the industrial investment cycle, which will support the US economic recovery. Since mid-2012, US corporates have been holding off investments for lack of visibility on the budget negotiations. And, unfortunately, the visibility has not improved much at all after this agreement. If anything, the real cliff is only coming now, with a debt ceiling which has already been reached and urgently needs to be negotiated up. Brinkmanship is likely to prevail again, which could delay further corporate confidence. Some caution is warranted from current market levels as the US consumer is likely to remain the main and fragile growth engine for the US economy in the short term.”

Mouhammed Choukeir, chief investment officer at Kleinwort Benson – The paradox is that continued uncertainty means the dollar will remain a safe haven asset.  

“Reading beyond the headlines is depressing. Of the three key issues – tax increases, spending cuts and the debt ceiling – policymakers have tackled just one: tax increases – though President Obama would like to see further tax hikes in future negotiations. Accounting smoke and mirrors allows the US to temporarily delay the automatic spending cuts, and a comprehensive deal on the debt ceiling, for around two months. The tax hike for the wealthy doesn’t change the long-term budget picture significantly; in fact, budget deficits will rise by $3.6 trillion in a decade.

“The fiscal cliff issue is unresolved. This is likely to increase market volatility, supporting safe-haven assets such as gold and some commodities. The drag on US consumer spending resulting from higher taxes – not just on the wealthy, but on 77 percent of American households through a higher payroll tax – means the Fed is likely to continue purchasing treasuries in an effort to spur growth. This should continue to support investment grade bonds by keeping yields suppressed at historical lows. Paradoxically, as the US debt and deficit issues continue to make investors jittery, the US Dollar can be expected to remain a safe-haven asset.”

Johan Jooste, chief market strategist, Merrill Lynch Wealth Management – The deal gets a ‘C’ grade which should satisfy markets

“Reduced uncertainty should allow equity markets, including those in Europe and led by more cyclical sectors, to make modest gains over the coming months. However, for markets to make a sustained break above their previous years’ highs requires a positive outcome of the fiscal and budget negotiations that are set to continue through to March. We believe such a positive outcome is eventually likely, yet as evidence over December showed, the political jostling may still lead to fluctuations in equities, although the trend should be higher. As for currency markets, the euro and British pound may continue their recent gradual appreciation against the U.S. dollar. However, with markets still hoping for a positive resolution to the eurozone sovereign crisis, much of the better U.S. fiscal news does now appear to be discounted by the euro and pound. 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. Markets in Europe are likely to be satisfied with a “C” for now.”

Peter Vanderlee, co-manager, Legg Mason US Equity Income Fund – Uncertainty over dividend taxes is eliminated.

“The resolution of the fiscal cliff is a positive for dividend paying securities.  Absent an agreement on the fiscal cliff, dividend taxes were set to revert to the marginal rate of the investor which could have been as high as 39.6%.  Instead, for many investors, dividends are permanently extended to 15% (and 20% for tax payers in the highest tax bracket).  This bodes well for dividend paying stocks as this tax rate is not as onerous as feared and it also eliminates any uncertainty over the future of dividend taxes.  Furthermore, this dividend rate will be the same as the tax rate on long-term capital gains, which translates into a positive for the continued prospects of dividend growth.”

 

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