The US government has gone into temporary shutdown on the back of the news that the two Houses of Congress failed to agree a budget. Markets have reacted negatively as a result, with the FTSE and the S&P 500 both losing ground.
However, leading industry experts say this is a buying opportunity rather than a serious setback, as the economy is improving and the US government will ultimately agree on a compromise. David Jane (pictured), who runs the TM Darwin Multi Asset fund, says this failed resolution was always likely but he says it will not derail the improvement in global macroeconomic conditions.
"This isn’t anything new and I think this was always going to happen," he said.
"From a markets point of view, it is going to have a lot less of an impact than some people will make out. There is the famous quote, 'it is the economy, stupid'. That is exactly what it is because we have the US parties kicking off and stuff coming out of Japan about the business over tax increases."
"But what really matters is data coming out of the economies. The global growth trend is broadly improving and that’s what matters for equities," he added.
Performance of indices year to date
Source: FE Analytics
Equity markets have performed strongly this year. According to FE Analytics, the FTSE 100 and the S&P 500 have both delivered double-digit returns and the manager says there is no reason why this trend cannot continue.
Jane adds that although the shutdown could cause volatility in equity markets, this will only be a short-term phenomenon as the failure of politicians has little impact on the actual economy.
"There is an increasing recovery in Europe and the UK is in great shape. Overall, I think markets are capable of going much higher from here," he explained.
"In the long-run, the actions of politicians make little difference. They can cause short-term tweaks and can create uncertainty by inefficient policy. Otherwise the economy is about you and me. The people who have jobs and create income are the people who really drive the economy," he added.
One of the major concerns about Congress’s inability to agree a budget is that the US government may default on its debt. However, Jane says this is incredibly unlikely.
"It is unthinkable that the US is going to default on its debt. Can you imagine the US defaulting on its obligations when they actually have the money to pay them?"
"It is like not paying your rent or your mortgage when you have the money to do so, buy you can’t agree with your housemate who pays what. It is absurd to think that the US will actually default on its credit."
"This is not going to happen and there will be a brokered compromise. Are you going to vote for politicians who damage the economy like that? I really don’t think this is going to make a huge difference to global economic growth over the next 12 to 18 months," he added.
Trevor Greetham (pictured), director of asset allocation at Fidelity, agrees with Jane and says any uncertainty will just provide investors with a good buying opportunity and that equities will continue to surge. "The US government has shut down for the first time in 17 years after House Republicans refused to agree spending plans that included Obama's affordable health care scheme, already signed into law," he explained.
"The impasse could drag on as negotiations are likely to factor in a rise in the US federal debt ceiling, which will become necessary later in the month. We do not expect the fiscal standoff in Washington to have a lasting impact and stock market weakness presents a buying opportunity."
"The dispute has the power to depress economic activity temporarily and it will play havoc with the economic release calendar. But the US is four years into a steady, self-sustaining recovery and the Federal Reserve stands ready to offset any marginal fiscal tightening that may come out of the negotiations."
"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," Greetham added.
Joanna Shatney, head of US large cap equities at Schroders, agrees this is a buying opportunity but says investors should not become complacent.
"The market was down slightly yesterday, but as we look towards the growth opportunities for the US economy and corporate profits over the next three years, we think any weakness 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," Shatney added.
She says that the problem clearly isn’t over and could cause trouble in the short-term. However, she believes investors who have a long-term horizon have little to fear.
"The bigger issue is the need to increase the debt-ceiling target in mid-October," she said.
"Failure to do so could lead to outcomes as dire as a US debt default, but we are generally in the camp that this will get worked through. It is most likely that the decision will be delayed into December, when it will again become a worry for investors. We are still bullish long-term."
"The S&P 500 is up 19 per cent this year and we are optimistic about the long-term as firstly we don’t see the market as overvalued, and secondly, the rally is supported by fundamentals – the market is 10 per cent above its prior peak and corporate profits are 20 per cent above their prior peak."
"When compared with summer 2011, the US economy is stronger than before, the Fed remains accommodative (QE2 had just ended in 2011), and global growth prospects (including Europe) appear more stable."
