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US sequestration poses downward risk

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Joanna Shatney (pictured), Head of US Large Cap Equities at Schroders, shares her views on the recent sequestration in the US… 

We are now in the first week of sequestration – sequestration refers to the mandatory cuts in spending that went into effect 1 March in the US, directly impacting defence and Medicare spending (part of the Budget Control Act of August 2011). 

While some of these cuts are already partially reflected in Wall Street estimates, there are likely to be some downward revisions to GDP by Street economists – there is probably another ~50bps downward revision risk.  We are watchful of these cuts, but we remain optimistic that growth prospects for corporate earnings will be stronger than consensus expects and that government cuts will not translate into a significant headwind.  While US fiscal worries linger, we see the cuts as manageable and expect the multiplier effects to be muted.  As long as risks remain, there will continue to be a ‘wall of worry’ for investors to climb, which means the market can still upside surprise.

There are other dates to watch including the Continuing Resolution (March 27th), which threatens a government shutdown; we think this is likely avoided but don’t expect to see any budget resolution until later in the calendar year.  We see this as a manageable risk as long as the confidence level of corporations and consumers is not significantly impacted.

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