An Obama victory is just what UK investors needed, says Jeff Salway
BARACK Obama’s US election triumph will prove a timely shot in the arm for UK investors and pension savers, experts have predicted.
Stock markets took a tumble in the immediate wake of the election as global investors measured the scale of the challenge ahead. But advisers and fund managers are eager to reassure private investors and pension savers that the outlook for the US market is a positive one.
And millions of people in the UK have a stake in what happens next to the US economy and markets – whether they know it or not.
UK investors don’t have the same level of direct interest in the US as in days gone by; just 4 per cent of the average investor’s portfolio is held in US shares and funds, according to Chelsea Financial Services. But UK pension fund ownership of US equities and the billions that investors hold in global investment funds and trusts – which typically have a US weighting of more than 40 per cent – mean any events across the pond will cause more than a ripple effect here.
Then there’s the 40 per cent of FTSE dividends that are still declared in US dollars, including those of some of the UK’s biggest blue chips, pointed out Haig Bathgate, chief investment officer at Turcan Connell in Edinburgh.
“A large number of the companies quoted on the UK stock market derive their earnings from the US and therefore any fall in economic activity resulting from the fiscal cliff can directly affect the profitability for those with investments in the UK stock market,” he said.
So there’s little doubt that the old adage that the rest of the world catches a cold when the US sneezes remains relevant. And the implications of failing to resolve the “fiscal cliff” could be dire. This is the end, in January, of billions of dollars of Bush era tax cuts and the implementation of hundreds of billions in spending cuts. The cost to GDP could be up to 5 per cent, economists warn, putting the need for an urgent compromise at the top of Obama’s priority list.
Failure to address it – and with the Republicans retaining control of the House of Representatives there’s no guarantee of a compromise – would stop the US recovery stone dead.
“This will impact global stock markets not just those who are directly exposed to the US,” said Bathgate. “From a general sentiment point of view, given growth in Europe is subdued and is slowing in China, the US has been doing a lot better on a relative basis, so anything which slows growth to the extent that the fiscal cliff could is likely to cause a sell-off in risk assets and lead to further anxiety in markets – which will again impact those with investments in the UK.”
But – like most economic and investment pundits – Bathgate is optimistic that such a bleak outcome is unlikely. “There is a very high incentive for both parties to get this fixed quickly,” said Bathgate. “The Tea Party element of the Republican party was marginalised significantly through the elections and therefore the centrist Republicans are now running the show in Congress again, which you assume would lead to a more pragmatic approach.”
The good news for investors is that provided the fiscal cliff doomsday scenario is avoided, the US economy could be set for a boom period, believes Alan Steel, chairman of Alan Steel Asset Management.
“The big picture is the oil and gas discoveries in Dakota, Montana and Texas that will be a game changer for the US economy and the rest of the world,” he said.
“The US will become an exporter of energy, costs are falling rapidly, profits are rising, unemployment will fall, incomes will rise, jobs and businesses are relocating to the US and manufacturing is being reborn.”
The US boom that Steel expects over the coming years presents an opportunity for UK investors to get more exposure to the US and the global businesses most likely to benefit from it.
“The funds worth buying are those growth funds that have struggled over the last 12 months, when safety first has been the approach.”
The biggest positive for individual investors is the certainty supplied by a decisive election outcome, according to Callum D’Ath, senior divisional director at Brewin Dolphin.
“Historically the best solution for the US – and therefore UK – stock market is when there is political gridlock in Washington, ie a Democratic president and a Republican House, as we have again for the coming term,” he said, pointing out that markets react badly to political tinkering. “If we get a compromise on the fiscal cliff, as I think we will, and the impact isn’t too detrimental to the US economy, then this should be positive for UK investors and savers.”