The year began with the long-awaited deal on the US ‘fiscal cliff’ – a compromise which can at best be described as mediocre.
However, at least a deal has been done which has averted a significant impact to the US economy in the first quarter.
We now have clarity for households and corporations over the taxation landscape, but uncertainty remains over the spending cuts which loom in March.
This stopgap agreement means we now face more weeks of negotiations about avoiding indiscriminate cuts and a sovereign default which could occur if the debt ceiling is not raised.
The US congress has raised the debt ceiling 79 times since 1960 without fuss. However, in these times of polarised US politics this has become a stumbling block. The assumption in markets is that a deal will be done, but it will inevitably go down to the wire, which could cause further volatility.
This ongoing saga in the US is very frustrating given the hopes that the three key issues which dominated 2012 – European sovereign debt, China, and US politics – would have all eased as we go into 2013. Certainly the first two issues have abated significantly – we are now in an extended period of calm in Europe, and Chinese growth has picked up. Equity indices are now close to or above their recent peaks and to hold on to these levels we will need to see a continuation in the benign economic data combined with a decent earnings season.
Many corporate profit expectations have been marked down as analysts reduce their estimates for 2013. However, there remain plenty of drivers for markets, not least from flows back into equities from fixed income and cash. These drivers can help markets make progress even if the political and economic backdrop remains moribund.
The derating of equities and the re-rating of fixed income assets has been extended as investors have become sceptical about the ability of economies to grow under the burden of debt.
However, we are confident that the level of global economic growth will not deteriorate much further. Growth is unlikely to be strong in 2013, but risk assets typically perform well when the momentum of the growth in the global economic cycle starts to improve. We believe that we are either at or very near that point.
Rob Burdett is co-head of multi-manager at Thames River Multi Capital
