US standing on the edge of fiscal cliff, warns Invesco’s Laing

The announcement of another round of quantitative easing (QE3) will not automatically result in a market rally, according to Invesco Perpetual’s head of US equities Simon Laing, who says the nation’s high level of debt is still a significant risk to investors. 

While there was a positive market reaction to the US Federal Reserve’s liquidity injection last week, Laing says investors shouldn’t get ahead of themselves. 

“Unless Congress can reach an agreement before the end of December, an estimated $487bn (£302bn) of tax and spending provisions will expire, resulting in a significant headwind to economic growth,” he commented. 

The S&P 500 advanced 1.54 per cent, to 1,464.23 points, last Thursday following Fed chairman Ben Bernanke’s announcement. But the index shed some of its gains on Friday, receding by 0.4 per cent ahead of the weekend. 

Laing warns that if Congress does not act to reduce the impact of imminent tax increases and spending cuts at the end of the year, it “runs the risk of stalling the economy”.

His warning runs contrary to the results of a recent FE Trustnet poll, in which a slight majority of our readers favoured the world’s largest economy as the safest market for capital preservation.

However, the manager expects Congress to pass a temporary deal which would extend the majority of the Bush tax cuts combined with a delay in automatic spending cuts. 

“This sets the scene for a massive budget package and reform bill in [the first quarter of 2013] that addresses the long term fiscal situation with tax reform, spending cuts and raises the debt ceiling,” he said.

“Austerity will likely be applied more cautiously and be dependent on the economy being strong enough not to be tipped back into recession.”

Laing says he anticipates some tax increases for middle Americans while health care cuts would increase, putting more pressure on the consumer.

However, he says the corporate sector could see a decrease in the higher tax rate, which could boost corporate confidence and lead to improved private sector spending. 

“The road to any agreement is going to be a rocky one, which could also put pressure on what is left of US economic momentum in the short-term,” he continued. 

“Long term, the prognosis improves, assuming a sensible deal is reached.”

Andrew Morris, managing director of Bristol-based Rowan Dartington’s discretionary management arm Signature, echoes Laing’s concerns and points out inflation will be one of the strongest headwinds facing the US economy in the coming months. 

“The main danger here is the inflationary consequences,” he explained. “Whereas previous QE had accompanied deflationary expectations, these no longer exist.”

Morris points out that the market's sigh of relief on the back of the QE announcement in the US, combined with the avoidance of a number of significant tail risks in Europe last week, drove investor confidence. 

However, he says it would be false to say the outlook is changed for the global economy. 

“Concerns such as the absence of a growth policy in Europe and China, as well as the US fiscal cliff, are all issues that must be overcome,” Morris finished.