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Fiscal Cliff: An Emerging Markets' View

November 26, 2012

As our team sees it, there are two main factors for global investors to consider: the U.S. economy’s future health, and President Obama’s foreign policy stance toward key countries, particularly China.
-Mark Mobius, executive chairman, Templeton Emerging Markets Group

Now that the U.S. presidential election is over and President Barack Obama has been re-elected to serve a second four-year term, we’re able to do what we always do after a major election or regime change, and that’s examine the potential implications of policy changes on our investments. As our team sees it, there are two main factors for global investors to consider: the U.S. economy’s future health, and President Obama’s foreign policy stance toward key countries, particularly China. 

Will the U.S. Fall off the Fiscal Cliff?

The biggest hot-button issue in the U.S. economy right now is impending “fiscal cliff,” a sweeping combination of tax hikes and government spending cuts which a then-deadlocked U.S. government put in place in 2011 as a last-ditch effort to reduce the nation’s US$1 trillion deficit. Unless the Republican-controlled House of Representatives can reach agreement on an alternate plan with the president and Democrat-controlled Senate, this fiscal cliff – the fallout from what’s formally called the Budget Control Act of 2011 – will go into effect in January 2013.

Some economists say that if the spending cuts and tax hikes contained in the Act go into effect, it will lead to a U.S. recession and the one-two punch of rising unemployment and reduced consumer spending. The U.S. Congressional Budget Office estimates a possible 4% hit to the U.S. GDP (negative growth) between fiscal years 2012 -2013.  I think such turn of events could create an economic disaster, as a recession in the world’s largest economy would undoubtedly impact the global economy, particularly Asia’s export industries. If the U.S. goes “off the cliff” it could take other countries down with it.

We can hope for the best, but we also have to plan for the worst.


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