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Fiscal cliff threat hangs over US asset allocation decisions

Fiscal cliff threat hangs over US asset allocation decisions

In the minds of fund managers, the US fiscal cliff is looming large, with some like Pimco's Curtis Mewbourne (pictured) doubting whether the politically split Congress can reach a solution, while others like AXA's Richard Peirson maintain a more positive outlook.

After Barack Obama’s victory in the US presidential election last week, fund managers are trying to assess what lies in store over the next four years.

The fiscal cliff still looms: if not resolved by 1 January, $600 billion (£376 billion) worth of tax hikes and spending cuts will be automatically triggered by legislation. According to the Congressional Budget Office, the fiscal cliff could cut three percentage points from US gross domestic product growth.

However, one thing all fund managers agree on is that neither Democrats nor Republicans want to see the country slip into another recession.

Waiting for a bipartisan solution

Ted Scott (pictured below), director of global strategy at F&C Investments, said the resolution of the fiscal cliff issue depended on the constructive attitude of the Republican-dominated House of Representatives to reach a solution.

Investec Asset Management’s strategist Thanos Papasavvas said it was ‘unlikely for the fiscal cliff to happen’ as he believes the executive and legislative arms of the US government would reach some sort of compromise.

But Citywire AAA-rated Curtis Mewbourne, Pimco managing director and head of portfolio management in New York as well as manager of the Pimco GIS Global Multi-Asset fund and the St James’s Place Multi Asset fund, did not think co-operation was likely.

‘Don’t expect grand bargains or bipartisan solutions,’ he said. ‘We have effectively a similar power structure [as before the election], so we’re struggling with the same issues now as we
were before.’

Fidelity Worldwide Investment’s head of global equities Richard Lewis remained hopeful of a budget agreement along the lines of the Bowles-Simpson proposal, which is based on a ratio of three-to-one spending cuts versus tax increases.

But Mewbourne said this did not look promising. ‘It’s unlikely the two parties will work together and come up with something Bowles-Simpson recommended several years ago, which gave guiding principles [on how to handle the fiscal cliff]’ he said. ‘The fiscal cliff will be a drag on the US economy: our expectation is around 1% of GDP.’

Not a reaction, but a strategy

Over the past few weeks, Mewbourne has moved around 3% of US equities to China, where he thought valuations looked attractive and where economic slowdown was priced into equity markets. In the US, he is invested in sectors like energy, exploration, insurance and mid-cap banks.

Mewbourne’s Pimco GIS Global Multi-Asset fund delivered 24.13% over three years to the end of October, just below the LCI Mixed Asset USD Balanced - Global benchmark, which returned 25.13% over the same time frame.

‘The defensive and conservative portions in the equity portfolio are something we’ve done for the past several weeks,’ he said. ‘It’s not something we’ve reacted to overnight, following the elections.’

He has also reduced his commodity exposure. He said the opportunities around fracking, the renaissance in manufacturing and the general recovery in the US were all things to look forward to, but not enough of a reason to increase onshore investment for now.

‘The energy sector is undergoing significant transformation in the US,’ he said. ‘We are moving towards new technologies. Fracking means we are increasing the ability to protect and increase employment in that sector. There is a shift back to chemical products. Facilities, which used to move to lower-cost areas, [are now being built here].

‘That’s a real development and it has long-term impact, but in the short term it’s not enough to offset the fiscal cliff.’

Hopes of recovery

Premier Asset Management chief investment officer Mike Jennings said the fiscal cliff, if it happened, would immediately trigger a global recession, even though markets were not currently assuming it would come to pass.

But Citywire A-rated Richard Peirson (pictured above), manager of the £390 million AXA Framlington Managed Balanced fund, said he was confident the fiscal cliff issue would be resolved ‘in due course’.

‘Neither party will want to see the reduction in GDP if there’s no deal,’ he said.

Peirson has 13% in US equities. He said this would not change due to the election results. His fund has returned 16.82% over five years, shooting ahead of the LCI UK Balanced and International Equity (50:20:30) benchmark, which delivered 8.52% over the same period.

Peirson was positive for the outlook of the US. He said it was in good financial shape with trillions of dollars sat on the sidelines.


‘The medium prospects for the US look good in terms of its growth, production, a competitive manufacturing base, more onshore investment and chemical plants being built in the US instead of South Korea,’ he said. ‘The bottom line is: nothing we have heard makes us change our positive stance on US equity markets.

‘With a bit of luck, we may get a better outcome for markets in [Obama’s] second term than in [his] first term: after four years, we could have learnt something,’ he said.  

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