US election outcome could cause legislative gridlock and delays in tax decisions

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Fund managers and economists have warned that investors face numerous risks whoever wins the tightly fought US election between Barack Obama and Mitt Romney.

The election reaches its conclusion tonight with both candidates neck-and-neck with the economy the driving force behind many voters’ decisions.

Both Obama and Romney have different economic visions and neither will find it easy to implement policy proposals, says Simon Ward, chief economist at Henderson.

“A Republican house would frustrate the plans of a re-elected President Obama to cut the fiscal deficit by raising the tax burden and lowering military spending. A president Romney, on the other hand, would be blocked from pursuing tax reform and repealing Obamacare by a democrat senate majority,” says Ward.

The US fiscal cliff is a combination of an expiry of temporary tax cuts, an introduction of new healthcare taxes and the start of central government spending cuts.

“The immediate risk for investors is that legislative gridlock and associated political brinkmanship result in a delay in rescheduling tax rises and spending cuts programmed to hit the economy in early 2013,” says Ward.

“Further ahead, the difficulty of agreeing a comprehensive and credible fiscal consolidation strategy suggests that the deficit will remain large in absolute terms and relative to other countries, posing a threat of further downgrades to the US credit rating,” adds Ward.

The current position of Ben Bernanke, the US Federal Reserve chairman is also up in the air. Bernanke has been responsible for leading quantitive easing policies and his term is due to expire in 2014.

Aviva investors senior US economist David Hillier says: “Regardless of who wins the race for the White House it is clear fiscal policy is set to be tightened, and possibly quite sharply.

“The ‘fiscal cliff’, a term coined by Federal Reserve chairman Ben Bernanke, describes a series of major tax breaks that are due to expire, and spending cuts that are set to kick in, over the next year or so.

Hillier adds: “The Congressional Budget Office – an independent agency that produces non-partisan analysis of economic and budgetary issues to support the Congressional budget process – estimates the tax increases and spending cuts will together reduce the federal budget deficit by $607bn, or 4 per cent of GDP, between fiscal years 2012 and 2013.”

Stuart Frost, head of RWC’s Absolute Return Bond and Currency team says: “In the short term an Obama victory should be positive for bonds, no change in Fed policy and potential gridlock over the fiscal cliff.”

“We are hours from the knowing who will be the next president of the United States. This of course has big implications for the fiscal cliff, the debt ceiling, and monetary policy,” adds Frost.