Some parts of the overseas financial press are bringing an almost blow by blow account from both sides of the US political spectrum in the lead up to the so called fiscal cliff. 

This makes good headlines and can create short-term market volatility and therefore trading opportunities for those who have the skills to take advantage of this. 

However, more important than this short-term “noise” is the reality that the United States will have less fiscal stimulus from next year, with some taxes likely to increase and some Government expenditure likely to be cut.  This is where the real market uncertainty lies – just how big will the fiscal handbrake be?

While this is a very necessary adjustment, for the ballooning levels of US Government debt that have reached unsustainable levels, it does come at an unfortunate time.  The US economy is starting to show some signs of life in key areas such as residential housing where new and existing home sales and prices look like they lifted off the bottom.  This, in turn, is aiding consumer sentiment with the US Conference Board Consumer Confidence Index at four and a half year highs. 

The improvement in housing, consumer confidence and unemployment are very necessary conditions if the US is to grow and inflate its way out of its debt mountain.  This growth strategy is in direct contrast to the austerity focus of Europe and economic historians will spend much of their time in future years comparing these two distinct approaches.

For now the US approach is getting better traction and the most likely scenario is that its growth will slow in 2013 but will still be better than Europe.  However, whatever the outcome we believe that the best investment strategy is to continue to focus on high quality companies that can cope with the ongoing uncertainty and prolonged deleveraging that will probably characterize the rest of this decade. 

Anthony Quirk

Managing Director