The US Debt Ceiling Vote
The US Senate last night ratified a deal to raise the US debt ceiling to prevent the world’s largest economy being unable to meet its debt obligations. The plan authorises an increase in the permitted level of debt by up to $2.4 trillion from $14.3 trillion subject to the successful implementation of budget cuts amounting to $2.1 trillion over the next 10 years. The package will ensure the US can continue to pay its creditors into 2013, a key component of President Obama’s original plan as it means he will not have to tackle the debt issue once again in the middle of election year. Although a compromise has been reached, concerns have already surfaced that the US may still lose its prized AAA credit rating in the coming months, as ratings agency Standard & Poor’s stated last week that $4 trillion in cuts were required to maintain the current rating, significantly more than the cuts announced.
Initial market reaction to the deal was positive, with exchanges globally posting strong gains as investor appetite for risk assets temporarily improved. However, early euphoria soon dissipated as concerns over US economic growth, which is forecast to be anaemic at best for 2011, sent markets downward with the UK’s FTSE 100 further adversely impacted by the release of weak domestic manufacturing data.
After a period of relatively little adjustment across our portfolios, with asset allocation changes remaining at a minimum, macro and micro economic issues, both in the US and elsewhere, as well as our continued focus on capital preservation over accumulation have led us to reduce our equity exposure with cash now a more prominent feature of our portfolios. Although cash offers little in the way of returns, with interest rates not expected to increase until well into 2012 at the earliest, its stability is somewhat comforting compared to equity and bond markets, which have looked overpriced for some time now and are becoming increasingly sensitive to concerns regarding the strength of the global economic recovery, which will no doubt refuse to abate any time soon.
While we have scaled back our equity exposure, we believe there are still opportunities to be exploited in the equity space and are confident our equity income funds in particular will continue to perform well, with UK dividends expected to grow 10.2% for 2011 as a whole. In terms of other asset classes, we maintain our faith in Absolute Return as the multitude of potential strategies should ensure healthy returns can continue to be made irrespective of market conditions, while Infrastructure is also a current favourite with perceived inflation protection, increased merger & acquisition activity as well as forced government privatisations worldwide all aspects that bode well for the asset class going forward. Our commodity weighting still consists of gold and agriculture, two areas we feel are suited to a low growth and an uncertain environment. Our exposure to Bonds remains low given the poor yields currently on offer and inflation headwinds.
Jack Rawcliffe BSc, IMC