US Fiscal Cliff

Fears over the US Fiscal Cliff were averted in January 2013 following a last minute deal to postpone the effects to the second quarter. If a last minute deal had not been reached, this would have triggered automatic tax rises and spending cuts amounting to $85 billion which would have sent the US economy into recession. The new deal by the government has simply “kicked the can down the road” until the next deadline arises. News that the Fiscal Cliff issue was “resolved” resulted in a boost to the US stockmarket with the Dow Jones and S&P 500 rising to all time highs in early 2013.

In March 2013, the US government were unable to postpone the sequestration, or spending cuts to healthcare and social security. However, this appeared to go unnoticed by the markets as equities continue to rise as at the current day and appear oblivious to the fact that the issues regarding the rising government deficit have not been fully addressed.

European Central Bank Cuts Interest Rates to 0.5%

The European Central Bank (ECB) cut interest rates from 0.75 per cent to 0.5 per cent in May 2013 after weak economic data reported by the struggling Eurozone economies. The ECB action aims to provide a boost to its Eurozone members amidst growing fears over the Eurozone crisis and doubts over the Eurozone recovery. The ECB follows the US, UK, China and Japan who have all cut interest rates to record lows.

The possibility of rising inflation is increasingly likely given the environment of low interest rates and increase quantitative easing adopted by the major Western economies. However, the global recession and weak economic growth have scaled back the effects of inflation for the time being.

Global Market Update

The Western Economies remain highly indebted and the major central banks are expected to use unconventional policies such as Quantitative Easing (QE) to boost growth in their respective economies. Bloomberg refer to the prospect of global currency wars as the major Western economies look to print more money in a bid to devalue their currencies and boost the international competitiveness of their export market.

The popular consensus in the media suggests that Sterling is likely to weaken over the near term following Britain’s recent credit rating downgrade and fears over an exit from the EU. Meanwhile the Euro has benefited from a minor boost as fears over government debt have receded following Mario Draghi’s pledge to support failing European banks in the form of unlimited QE. The US Dollar has also strengthened from avoiding the “fiscal cliff” (for now).

The current environment of low growth, rising inflation and low interest rates makes it increasingly difficult for savers to generate a reasonable return on their investments. Investors are willing to take on higher risk in order to maintain their required returns. This is to the benefit of small businesses as we have seen a significant increase in angel investors in 2013 and a general trend of investors seeking to invest in well managed small businesses. There is considerable focus on companies with strong products and good growth prospects, supported by high quality management teams. In addition a business with a robust balance sheet and strong cash flow potential will be well positioned to raise cheap finance and explore its business opportunities.

The low interest environment has also seen an increase in corporate bonds. Contractors with excess funds will find that they can secure better interest rates by investing in corporate bonds rather than keeping the money in the bank. Corporate bonds are not without risk and investors should seek financial advice from a professional advisor before exploring these opportunities.

Many believed that any recovery is likely to be led by the US whose economy is showing signs of growth. It is hoped that once president Obama tackles the issue of the US Fiscal Cliff, the US will surge towards recovery.  A large number of US multinational corporations have been stockpiling cash in anticipation of a recovery. Once the labour market improves and confidence is restored in the economy, we may well see the beginning of a recovery. The progress of the US may well be a catalyst for growth in the wider market including the UK and Europe.