US blue-chip companies could rally in 2013, says PSigma
US blue-chip companies could lead a surprising market surge in 2013, says James Abate, manager of the PSigma American Fund.
Such a surge would depend on the positive resolution of a number of ‘Big Picture’ concerns, including the sovereign debt crisis in Europe, slowing growth in China and the US fiscal cliff after the November elections.
For 2013, says Abate, “in our positive scenario, we would emphasise our belief that price-earnings multiple expansion on stocks will be linked to an alleviation of the Big Picture concerns and, most importantly, resolution of the fiscal cliff, all of which are likely to prevent the US economy from tipping back into recession.”
Abate says the most important elements of the fiscal cliff are: reversal of the Bush tax cuts and the payroll tax cut; elimination of extended unemployment benefits; the Obamacare tax increase; and the automatic spending reductions linked to the expiring debt ceiling. If nothing is done, taxes will rise on both the wealthy and middle class, while cuts are made in both defence and non-defence spending.
“If only spending cuts were involved,” Abate says, “the falling off the cliff might well be positive, since the cuts would take away resources from wasteful areas. However, given the large component of tax increases – particularly on capital gains and for small/mid-sized businesses, the next leg of economic growth is not easy for us to see as stated.”
Abate believes that agreement over the fiscal cliff deal will entail higher taxes and spending. Abate says: “The question will be by how much and when corporate America achieves the clarity it requires on new tax rates, regulations, etc. to allow investment plans and budgets to move ahead with confidence.
“Our hope is that the politicians will simply not maximize the programmes of the various constituencies, which are dependent on government unconcerned with the economy’s future after January 2017. The division of government with a Republican House and Democratic President who does not have to seek re-election makes us more optimistic than normal when relying upon politicians this time.”
In such a scenario, Abate says, “of private investor discontent with the yield and risks of sovereign financial instruments, i.e., bonds, global investors could rediscover the discrete charms of US multinational stocks,” particularly in the light of the risks involved in buying foreign stocks.