Chief Investment Officer, Haig Bathgate, discusses the effect that the US market outlook is having on UK investments and pension funds following the presidential election.
Haig comments on the 40% of FTSE dividends that are still declared in US dollars, including those of some of the UK's biggest blue chips.
"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."
Haig's assertion substantiates the theory that"the rest of the world catches a cold when the US sneezes", 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%, 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 in its tracks.
"This will impact global stock markets not just those who are directly exposed to the US. 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 – Haig is optimistic that such a bleak outcome is unlikely."There is a very high incentive for both parties to get this fixed quickly. 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."
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