US Government shut down a buying opportunity says Fidelity’s Trevor Greetham

1st October 2013

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The Government shut down in the US and associated stock market weakness represents a buying opportunity says Fidelity’s Trevor Greetham.

Greetham, the director of asset allocation at Fidelity Worldwide Investment says: “The US government has shut down for the first time in 17 years after House Republicans refused to agree spending plans that included President Obama’s affordable health care scheme, already signed into law. The impasse could drag on as negotiations are likely to factor in a rise in the US federal debt ceiling that will become necessary later in the month.

The Republican-majority US House of Representatives failed to agree a compromise with President Obama and the Democrat majority senate and the arguing looks set to continue with House of Representatives speaker John Boehner claiming that the House had done its work and blaming the Democrats.

But Greetham is relatively upbeat. He says: “We do not expect the fiscal standoff in Washington to have a lasting impact and stock market weakness presents a buying opportunity.”

He says that while the stand off may depress growth temporarily, and play havoc with the economic release calendar, it should not undermine the recovery significantly particularly with the Fed standing by to intervene.

“The dispute has the power to depress economic activity temporarily and it will play havoc with the economic release calendar. But the US is four years into a steady, self-sustaining recovery and the Federal Reserve stands ready to offset any marginal fiscal tightening that may come out of the negotiations.

“When the smoke clears we will see a global expansion that is strengthening and broadening with monetary policy set to stay loose in every major economy. An equity-friendly backdrop.”

Joanna Shatney, Head of US Large Cap Equities says: “Haven’t we dealt with this before? With political gridlock over the 2014 budget, we have breached another US government deadline. And once we get past this issue, there is another one right behind it surrounding the need to raise the debt ceiling by mid-October.

“The market was down slightly yesterday, but as we look toward the growth opportunities for the US economy and corporate profits over the next three years, we think any weakness in over the short-term should be buyable. While the largest risk is that we go into a long-term shutdown, we believe any real decisions will get pushed into December (or later), when it will have to be dealt with again.

“So what is happening? The latest of the ‘worry’ rungs to climb is the US government stalemate around the funding of ‘Obamacare’ or the Affordable Care Act (ACA). House Republicans have made the main issue in this debate about defunding the ACA. Initially, we had been hopeful that the Republicans would pass the bill, finding some reconciliation in the Senate, which had reversed/omitted the defunding portion of the bill. However, this has not happened and we are now in shutdown.”

Shatney says the next deadline matters more

“The bigger issue is the need to increase the debt ceiling target in mid-October. Failure to do so could lead to outcomes as dire as a US debt default, but we are generally in the camp that this will get worked through. It is most likely that the decision will be delayed into December, when it will again become a worry for investors.

“We are still bullish long-term. The S&P500 is up 19% this year, and we are optimistic about the long-term as firstly we don’t see the market as overvalued and secondly, the rally is supported by fundamentals – the market is 10% above its prior peak and corporate profits are 20% above their prior peak. We welcome investor worries in order to have a ‘wall of worry’ to climb. However, when compared to summer 2011, the US economy is stronger than before, the Fed remains accommodative (QE2 had just ended in 2011), and global growth prospects (including Europe) appear more stable.”

“In our view, the greatest risk to our thesis is that one or more of the following plays out: Firstly, default on debt, secondly, the impact on GDP is worse-than-expected or thirdly, government impasse negatively impacts corporate and consumer sentiment.”

 

 

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