View the article online at http://citywire.co.uk/money/article/a598185
Sebastian Lyon: Europe crisis a rehearsal for the main US event
Sebastian Lyon, the manager of the Personal Assets investment trust, has warned the US may also be headed for a fiscal crisis.
Fears about the eurozone have weighed heavily on markets since 2010, but Sebastian Lyon, manager of the Personal Assets investment trust, fears the crisis engulfing the Continent may only be a curtain raiser for a more severe US disaster.
Over the months ahead, Lyon expects his job of preserving investors' capital will become tougher as politicians make the difficult choice between severe austerity – which is likely to trigger deeper slowdowns and reduce the taxes collected by governments – or increased borrowing in the hope that it will buy stalling nations some much-needed growth.
Regardless of the choice they make, Citywire AAA-rated Lyon said the 'maths do not stack up', pointing out both approaches could lead to higher sovereign debt costs which hamper governments even more.
But this is far from Lyon's biggest concern as political leaders are still able to rely on central banks to keep countries afloat and inflation in check.
Instead, he is keeping a close eye on the situation in America, where the recovery is looking increasingly fragile following weak labour figures in May and yesterday's raft of poor economic data.
Lyon said: 'Our greatest concern is that the European challenges that have dogged markets since early 2010 are merely the dress rehearsal for the main event – a US fiscal crisis. While the UK and Europe have at least tried to tame their budget deficits, the United States has pushed ever harder on the fiscal accelerator.
He added: 'Stock markets swooned last August when they got a shock preview of what might happen should the brakes be applied.'
Lyon, who over three years to the end of April increased Personal Asset's net asset value per share by 53.45% versus his benchmark's 42.22%, is not the only highly regarded investor watching the US for signs of trouble.
Last month, Societe Generale's Albert Edwards, a key figure in the bank's strategy team and a well-known market bear, told clients to prepare for 'all hope being crushed'. He forecast America's Standard & Poor's (S&P) 500 index would fall below its March 2009 666 intraday low, while the benchmark US 10-year debt yield would fall below 1% on hard landings domestically and in China.
'The secular equity valuation bear market began in 2000 and renewed global recession will be the trigger to catalyse the third, and hopefully final, gut-wrenching phase of valuation de-rating,' Edwards said.
This week Goldman Sachs joined the US bear camp by predicting a decline of around 5% in the S&P 500.
It recommended its clients short the index, setting a target of 1,225. The S&P 500 closed at 1,325 yesterday, having dropped 1.6% on the Goldmans' warning and an unexpected decline in factory output. It is currently up 5 points today at 1,330.
Analysts at Data Explorers have also noticed increased bearish sentiment surrounding the US and a rise in the number of stocks on the S&P 500 being shorted, ie sold on the basis that their share price will fall and can be bought back at a profit.
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by Gavin Lumsden on Jan 20, 2017 at 17:01