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M E D I A  C E N T E R

November 2012 - The U.S. Election (and fiscal cliff) is Now Right Upon Us

October was an eventful month till few days ago with the arrival of Hurricane Sandy in New York. As this note goes to press, Sandy appears to be in the top five in terms of economic damage among modern hurricanes. In terms of economic damage, it is estimated to be between $10-20bn with estimated insured losses of $5-15bn. Overall, the region impacted by Sandy represents about 25% of the US economy and could cost about a 0.6-0.8 % hit to annualized Q4 GDP growth.

The US fiscal crisis is now right upon us, with the Nov 6 elections letting voters express their views on tax hikes versus cuts in spending. Congress then needs to act urgently to avoid a recession caused by fiscal tightening in January, and needs to continue next year on a 10-year fiscal plan. Our best estimate is that the elections do not provide a clear mandate for either side, that Congress does act to bring 2013 fiscal drag down to 2% of GDP, instead of 3.7% without action, but that a longer-term plan remains elusive, keeping a tab on investing by both investors and companies. If we were to get a US long-term fiscal plan next year, then it would surely create upside on stock markets, and be supportive to growth, both US and global, in our view.

In China, there seems to be strong consensus for the view that the worst is over and there are green shoots. Most Chinese data have either been stable for last couple of months or seen an upturn. The most notable upturns have been in purchasing managers index, exports, land sales and railways infrastructure investment. Consensus for GDP growth is around 7.8-8.0% year-on-year per quarter for the next few quarters following the recent Q3 figure of 7.4%.

Along with the decline in European tail risks and encouraging increases in US consumer and business confidence, this makes us considerably less concerned about a possible hard landing scenario unfolding in China.

Our preferred instrument to express our positive views since the start of the year has been through high-yield bonds, with a strong preference for US companies. Low but stable growth, low macro volatility, low default rates and low interest rates guidance extended into 2015 are all positive forces for this strategy. We also view a significant correction as unlikely. Therefore, we stay long, focusing on US companies with stable cash-flows, limited leverage, diversified funding sources and high cash levels.

Besides bonds, our asset allocation maintains a long position in high dividend stocks and Gold as a play on further global quantitative easing. Now more than ever, with global rates being so low and some valuations looking expensive, good name picking is essential.


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