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US government shutdown: it's serious, but don’t panic
Financial markets have moved little today, even as the US government goes into partial shutdown as politicians fail to negotiate a budget settlement.
Here’s what fund managers and analysts had to say about the impact on investors:
First, some definitions
Don’t confuse the shutdown with the debt ceiling, says Brian Jones of Societe Generale:
‘The federal government shutdown and the approaching debt ceiling are two separate issues. A shutdown occurs because the government does not have the legal authority to spend money on non-essential services.
‘A debt ceiling crisis occurs when the government is mandated to spend money, but lacks the legal authority to borrow funds to pays its obligations. The two are related purely by timing, which in the current case is almost coincidental.’
Don’t sell, says Adrian Lowcock, senior investment manager at Hargreaves Lansdown:
‘This doesn’t look like a selling trigger. Investors should focus on their long-term goals and use any short-term weakness as opportunities to invest.’
Hargreaves provided a useful reminder of a similar previous episode: ‘In August 2011 a similar scenario played out. The S&P 500 fell 19.74% from its peak in July 2011 as the S&P credit rating agency cut their top notch rating for the US and investors sold out. However by the end of the year the S&P had recovered and ended the year up 1.46%.’
Today's chart story 'How stock markets fall, but nearly always bounce back' makes a similar point.
In the price
The dollar has declined today, notes Marc Ostwald, but in general there has been little reaction from financial markets to the news from Washington.
'It is the kind of development markets have plenty of time to discount ahead of the event. Federal 'shutdowns', in any case, have been a remarkably common occurrence, with eighteen instances since 1976.'
Shutdown will hit IT companies
Walter Price, manager of the RCM Technology Trust , which mainly invests in the US, is positive about both the medium-term prospects of the US and technology sector. But the latest political crisis in Washington alarmed him.
'If you're a government agency you're going to be very reluctant to make a commitment to a large technology company and buy any large capital equipment,' he said.
Corporate spending, which was normally strong at this time of year, would fall and would stay depressed for as long as uncertainty remains.
'Companies are reluctant to add new employee so job growth will be mediocre,' said Price.
'I think it means the US will continue to be a low growth economy for a while,' he concluded.
US growth will return
Investors in the US shouldn’t forget about the growing strength of American corporates and the economy, says Joanna Shatney, head of US large cap equities at Schroders:
‘The market was down slightly yesterday, but as we look toward the growth opportunities for the US economy and corporate profits over the next three years, we think any weakness in over the short-term should be buyable. While the largest risk is that we go into a long-term shutdown, we believe any real decisions will get pushed into December (or later), when it will have to be dealt with again.’
Similarly, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, expects an ‘equity-friendly backdrop’.
‘We do not expect the fiscal standoff in Washington to have a lasting impact and stock market weakness presents a buying opportunity.’
‘When the smoke clears we will see a global expansion that is strengthening and broadening with monetary policy set to stay loose in every major economy. An equity-friendly backdrop.’
But don’t expect a rally, says Mark Holman of TwentyFour Asset Management, especially with shares looking dear.
‘With the US government in partial shutdown, a debt ceiling to be negotiated before 17 October and a vote of no confidence to be held in Italy tomorrow, it is hard to see a rally from the status quo, especially given that valuations are broadly fair.’
A solution has to be found
All commentators agree that a default – the unlikely scenario where the US debt ceiling isn't raised by 17 October – would have much more serious consequences for investors.
Nomura's Lewis Alexander said public pressure should ensure that a solution is found:
'We do expect that a way forward can be found before the debt limit becomes binding'
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on Dec 06, 2013 at 14:28