With the deadline for the US to extend its debt ceiling just days away, there is an increasing risk that the nation could be forced to default on some of its foreign debt interest payments.
This, Dampier says, could cause a knock-on effect similar to the one seen in September 2008, when equity and bond markets collapsed globally.
When asked what would happen if the US government cannot resolve its budget crisis by midnight on 17 October, he said: "It would mean that what is considered the world’s most important and safe asset, US Treasury bonds, would not be able to pay interest on their debt, so the risk of a Lehmans-type moment is possible."
"But the Americans don’t live in isolation. As the world’s most important and biggest economy, there has to be a huge knock-on effect around the world."
Performance of indices in 2008 and 2009
Source: FE Analytics
In the latter stages of 2008, funds investing across a number of asset classes suffered huge falls. IMA equity sectors were down up to 50 per cent at one stage in 2008, while even traditionally low-risk bond sectors incurred double-digit losses.
Most funds made a big chunk of these losses back by the beginning of 2010, but it was a nervous time for the vast majority of investors – particularly those approaching or in retirement.
Dampier (pictured) says that while it is impossible to predict whether the impact of a US government shutdown would be comparable, he believes big losses would be inevitable. "I would expect equities to fall, but by how much, I don’t think anyone has a clear idea," he said.
"Sovereign debt like UK government gilts and German Bunds would probably follow the US Treasury market. A possible default would see the price of the bonds fall in value and yields rise, although so far the threat of this has not seemingly caused a major problem to bonds."
"It is also important to acknowledge that we’re really not sure how this will play out. For example, if US Treasuries do come under pressure, then investors could pile into Bunds and gilts simply in pursuit of 'the next safest thing'."
"I would expect physical gold to rise as it remains the final store of value in a crisis. Other than that, the most uncorrelated asset to all this would be cash," he added.
In terms of what effect a default would have on the US dollar, he said: "It would see it go down against leading currencies."
While like most industry commentators, Dampier expects the Republicans and Democrats to come to an agreement in the next few days, he says the risk of this not happening should be enough for investors with a short-term time horizon to jump ship from risky assets and hold cash instead.
"If we could be sure of the outcome of 17 October, we could be sure of an answer," he said. "Because this is such a momentous decision, the market has remained fairly sanguine."
Performance of indices over 3months
Source: FE Analytics
"In reality, no-one believes this will actually happen. The market is betting on a last minute deal at five to midnight, so at the moment I am sure the volume of shares being traded, particularly in the States, is tiny as I believe the market is expecting a rally once the deal is done."
"Conversely, of course, if no deal is done I think the market fallout could be far more severe."
"I would stay invested as I still think a solution will be found, but if you want to eliminate any risk of market volatility in the short-term, then the logical thing to do is to sell now."
"Those with a five-year view should just put on their tin hat."
M&G’s Jim Leaviss (pictured) agrees that the US deadlock will have a big impact on investment, but this time from an economic point of view.
He thinks the likelihood of the impasse adversely affecting GDP growth in the US will ensure that the Fed does not taper quantitative easing until at least next year.
"The US government shutdown not only has political implications, it also has an economic impact that should not be underestimated," said a spokesperson for M&G.
"Although difficult to assess, we have seen estimates of a drag on GDP of -0.5 per cent for a two-week shutdown to -1.4 per cent for a three- to four-week shutdown period."
"Factoring for an already dovish Federal Reserve amid a very low core inflation rate, Leaviss therefore thinks that the government shutdown and its economic impact, particularly the longer it takes, makes tapering in 2013 unlikely and turns it into a story for 2014."
Leaviss believes a further downgrade of US debt is a severe possibility, though points out that the last time the S&P did this back in 2011, it actually strengthened demand for Treasuries.
The manager has recently increased the average duration of his holdings in the M&G Global Macro Bond fund, believing that the market panic over QE tapering and rising interest rates in May and June of this year was an over-reaction. However, the fund still has a slight short-duration bias overall.
