UBS manager: US fiscal cliff will cause low valuations and volatility

UBS client portfolio manager Grant Bughman says that he expects the US fiscal cliff will result in lower valuations and volatility in the US market.

The US fiscal cliff refers to a large predicted reduction in the budget deficit and a corresponding projected slowdown of the economy if specific laws are allowed to automatically expire or go into effect at the beginning of 2013.

Bughman, who is part of the team that runs the £126m UBS US growth fund, says that he does not expect there will be a huge impact on GDP, as it does not seem likely that newly elected politicians will allow a 3 per cent impact on GDP to take hold by not tackling the fiscal cliff.

He says: “Both sides will come up with some solution to prevent a detrimental economic impact from not tackling the fiscal cliff and it will either be resolved in the US temporarily going over the fiscal cliff come January 1 or where they come out with some short-term measures to prevent the impact from taking hold in the first quarter and then the detail comes later.”

Bughman says he expects the impact of the fiscal cliff to be more psychological and impact valuations in the US market.

He adds: “Some retail investors in the US have decided to potentially lock in gains and so there was a sell off following the election. A lot of that was a resulting from anxiety around the fiscal cliff, but for some investors it was the realisation that are sitting on long-term gains with favourable capital gain rates. They do not know what they will be come 2013 and so they decided to take that money to the sidelines.”

He says that the uncertainty is going to prevent a significant move up in the equity markets.

“It will be range bound, where we have seen in the last few weeks the S&P trading around 1400 and below and bouncing back again. Volatility creates opportunities to pick up attractive companies cheaper.”

Bughman has a larger allocation to elite growth companies, like Amazon and Apple, which are the long-term growth companies because valuations are very attractive based on the fiscal cliff and the crisis in Europe.