Fiscal landslide leaves US fund managers lukewarm

The US Congress began the year with a partial deal to avoid automatic spending and tax reforms. Much of what matters seems to be still ahead with negoatiations being pushed into February and March.

Income, payroll, and capital tax reforms are considered only the half-way point up the cliff. Spending cuts haven't even been touched despite warnings from credit rating agencies.

Alongside views that foresee a re-run of 2011's political impasse surrounding the debt ceiling, Pimco's Bill Gross described the deal as a sign that 'Washington is still dysfunctional'. Moreover, the payroll tax hike will hit GDP by 5%, he said.

Here are the thoughts of fund managers speaking to Citywire Global:

Scott DiMaggio, Alliance Bernstein's director of fixed income:

'The package was alot smaller in scope than we expected and there are still a whole host of negotiations needed to reduce the deficit down the road.

What no one has even talked about is how the rating agencies will react to the deal. The fact that the deal hasn’t shown a credible plan for deficit reduction will likely bring the credit ratings back into the forefront.

Whilst monetary policy has been supportive for a market rally as the economic fundamentals improve, on the fiscal side, I don’t have much confidence that we won’t return to the debt ceiling impasse in summer 2011.'

Torgeir Høien, manager of the Skagen Tellus fund:

'The scene is set for a new Congressional battle in late February. Republicans, who will control the House of Representatives, will try to extract reductions in federal spending growth from the Democrats in return for raising the debt ceiling now that they have succeeded in making most of the temporary Bush tax cuts permanent.'

At the heart of the issue is the growth of entitlement programs (Social Security, Medicaid and Medicare), which is one of the biggest drivers of federal spending in the US and which needs to be reigned in if the federal debt is going to be stabilised as a percentage of GDP.'

Cormac Weldon, manager of the Threadneedle American C1 fund: