Fund managers have outlined the challenges facing Barack Obama after he was elected to serve for a second term as US president, calling for politicians on both sides to work closely together to resolve the budget deficit reduction issue.
Mitt Romney went neck-and-neck with Obama in the election, with the economy dominating many voters’ decisions. The focus is now on negotiations between the two parties regarding the budget deficit which will take place in Decemeber.
Head of global equities at Fidelity Worldwide Investment Richard Lewis says: “After a lot of wailing and gnashing of teeth, we are hopeful of a budget agreement along the lines of the Bowles-Simpson proposal which is based on a ratio of 3:1 spending cuts versus tax increases.”
Nick Cowley, co-manager of the Henderson Horizon American Equity fund, says: “For Obama to deliver on his promises, he will have to work closely with Republicans, something we have seen little of in the last four years.”
Obama’s victory provides stability for Ben Bernanke’s position as the US Federal Reserve chairman. Work will now begin on tackling the ‘fiscal cliff, the term coined by Bernanke to describe the combination of an expiry of temporary tax cuts, introduction of new healthcare taxes and the start of central government spending cuts.
Threadneedle Investments head of US equities Cormac Weldon says: “Mitt Romney had pledged to remove Ben Bernanke as chairman of the Federal Reserve and was opposed to quantitative easing, which has proven supportive of both equities and the housing market.”
Henderson manager Cowley adds: “The recent quarterly earnings reports from US companies have highlighted that the fiscal cliff is freezing the decision making process and thus holding back capital spending and new job creation.
“This runs the risk of derailing the positive progress that the US economy is making, with notable signs of recovery in both the housing and auto sectors. Avoiding the fiscal cliff would allow this progress to continue and result in a compelling outlook for US and global markets.”
Premier chief investment officer Mike Jennings says: “Given that equity markets do not like surprises and change, a returned President will be greeted with modest relief. Problems are far from resolved though.
“With over $1trn of annual budget deficit for four successive years, and $16 trillion of national debt, there is a clock ticking.”
He adds: “With the Republicans extending their control of the House of Representatives, the US administration will find itself in policy gridlock. The ‘fiscal cliff’ looms at the end of the year whereby $600bn of automatic tax hikes are scheduled. At approximately 4 per cent of US GDP, such an event would immediately trigger recession globally.
“Markets assume that it will not come to pass but, now that the election is out of the way, I suspect that there will be increasing focus on this for the next two months.”