Member Article

Clouds on the investment horizon lift

Richard Clark and Simon Patterson, private bankers at Barlcays Wealth and Investment in Newcastle, share their thoughts on the investment landscape following the US fiscal cliff deal.

So, as we begin what is bound to be an interesting, although uncertain, New Year, it will be of some relief to investors that the two biggest clouds on the investment horizon may lift a little in 2013. The US ‘fiscal cliff’ is slowly being tackled, and we see the European Central Bank (ECB) successfully backstopping the euro.

In the small hours of New Year’s Day, the US Congress passed a bill containing some modest tax increases. Spending, the debt ceiling, and the longer-term context, have still to be addressed, but an immediate crisis has been averted.

The structure of the deal implies, approximately, a 1.0% drag on US GDP in 2013, driven primarily by the increase in the payroll tax and higher taxes on upper income households – this compares with the potential 3.5%-4.5% drag that would have come into play if no legislation was passed. The focus now turns to the need to raise the debt ceiling and addressing the automatic spending cuts necessitated by the sequestration process. These issues will likely be a source of further wrangling in the new Congress as we approach the end of February.

Meanwhile, private-sector activity is slowly gathering momentum – most visibly in consumer spending. As the market focuses on the fiscal cliff, the US consumer has been quietly recovering and likely to be a key driver of economic activity as the year progresses. Employment and wages are rising, and bringing confidence with them. As the housing-market recovery gathers pace, and we are confident that the US economy has the potential the drive global growth in 2013.

The outlook for Europe is similarly getting brighter. Spain will be funded: probably officially, possibly privately. The ECB’s promise ‘to do whatever it takes’ is credible, and this is more important than whether Spain formally asks for help or not.

In general terms, we favour stocks over bonds, and corporate over government securities. New-year volatility would be an opportunity to add to positions in developed stocks, in particular.

Perhaps most importantly, as we expect continued volatility in the markets this year, is for investors to start the year by reviewing their investment portfolio and ensuring it enters 2013 in the right place. The priorities of the portfolio, the investor’s own appetite for risk, and life circumstances, such as birth, marriage or retirement may very well have changed since the last time they took stock, and with the fast-paced life of today, investors should look to regularly check and validate their overall financial goals to ensure they reconcile with their current investments.

As always, we do emphasise that investing in shares is not for everyone. Their value can fall and you can get back less than you invest – if you are unsure, you should seek independent advice.

This was posted in Bdaily's Members' News section by Richard Clark .