Investment Adviser, Fund Selector - October 2013
Ceiling the deal
At the time of writing, the standoff in the US continues. The government remains partially shut down, a conclusion hasn’t been achieved regarding raising the debt ceiling and the Democrats and Republicans continue to dig their heels in over negotiations, creating a fiscal impasse. However, the situation is very fluid and could be overtaken by events, positive or negative, very quickly indeed. By the time you are reading this, the story is likely to have unfurled considerably.
So, how do we continue to manage assets while searching for the answer to the $16.7 trillion dollar question? The first point is to remember that this is largely a political rather than an economic stalemate, the ultimate game of brinkmanship. The last time the battle lines were drawn over the debt limit was in 2011 and, at the eleventh hour, resolution was achieved. We are therefore mindful of the potential outcomes, ranging from default, to the use of constitutional loopholes but focus on the effect on markets in the short term and the potential ramifications going forward.
In China, the largest holder of US debt there are calls for a ‘de-Americanised’ world and suggestions that the dollar shouldn’t be the world’s reserve currency. It is to be expected that global leaders will take the opportunity to pour scorn on the tit for tat rhetoric that passes between the White House and Capitol Hill. Historically, the US has been particularly vocal on the subjects of the European debt crisis, Japan’s era of deflation and the appreciation of the yuan in China. It is therefore hardly surprising that the US currently has many critics, (both internally and externally).
With all these considerations in mind, the MyFolio range of funds that I manage retains an overweight exposure to the US. The shutdown will certainly have some effect on the economy and key economic data hasn’t been released, but underlying US GDP growth and earnings still appear more robust than elsewhere in the developed world. Furthermore, 90% of the furloughed workers received pay and consequently the effect on GDP should be minimal. This gives us confidence that the short-term impact on markets will be quickly reversed.
The culmination of recent events is likely to delay ‘tapering’ further and loose monetary policy will probably remain in place while inflation is benign and there are pockets of vulnerability in the economy. The continued use of quantitative easing and forward guidance will allow the economy to improve, while having the side effect of further supporting the stock market. There will doubtless be bouts of nervousness until ‘normalisation’ returns, but we remain confident that skilful asset allocators can navigate a steady course through such times of uncertainty. We continue to focus on the underlying fundamentals in the context of global growth and invest where we believe we can obtain the best returns for clients.
Bambos Hambi, Head of Fund of Funds Management, Standard Life Investments
Investment Adviser Multi Manager Column October 2013