Fiscal landslide leaves US fund managers lukewarm

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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:

'Given the political situation, with both parties being so far apart in terms of spending and tax cuts, I’m happy that a deal got done.

Capital expenditure in the last quarter went down and for the next quarter we will be looking out to see if companies are willing now to spend more with more clarity.

We still stay away from defence and other sectors linked to public spending. The exception here is healthcare where we think that fundamentals still look cheap and where I think we could see most upside from political negotiations.

IT companies, especially, had constrained spending in the fourth quarter and this is one area that we would we would be looking to add in the next quarter.

I think we are going to be even more disappointed with what we are about to witness.  I’d be surprised if there wasn't a return to the market frenzy around the debt ceiling which we saw in 2011.'

Mike Corcell, manager of the RWC US Absolute Alpha fund:

'We are going to have another debt ceiling battle two months down the line but we are now in a situation where we expect the worst from politicians and the fact that they came up with something of course meant markets would bounce.

In relative terms, the US economy is actually now in pretty good shape coming up from a low base.

The housing picture is getting better, employment figures are getting better and indicators are showing that consumer confidence has pretty big divergence between future expectations and current expectations.

That is all while we have has this fiscal cliff nonsense and noise going on. We are feeling pretty good about the economy and the market is very reasonably priced, at 13x earnings.'