US recession looms unless ‘fiscal cliff’ solution found

The US economy could be tipped into another recession unless a solution to the imminent ‘fiscal cliff’ is found, according to iShares.

Chief investment strategist Russ Koesterich said investors’ concern could soon, if it has not already, shift away from problems in the eurozone to the US because for the upcoming few months the biggest risk is the fiscal cliff which could hit at the end of the year.Koesterich said if the US cannot address some $800bn of bills simultaneously hitting thecountry when the terms of the Budget Control Act of 2011 are scheduled to go into effect at midnight on December 31, it may push the economy back into recession at some point in 2013. He said the slow economic growth might also exacerbate the issue and predicted a slow, below-trend growth in 2013 for the US of about 2% compared to about 2.5% to 3% globally.Elsewhere, despite the fact the household debt to disposable income ratio has been in decline since its peak in 2007, Koesterich said it is still not back at the sustainable level seen in the late 1990s. Yet according to Koesterich, people seem to think the fiscal cliff will be avoided as only 11% of institutional fund managers believe the US will actually topple as a result.As a consequence, Koesterich said investors might begin to look at the opportunities in smaller developed countries such as Canada, Australia, Singapore and Switzerland. He said these countries came out of the financial crisis better than the US, UK and Japan and have outperformed global markets in 2012 but remain cheap. Subsequently, investors could bring down their US, EU and Japanese exposure, he added.He warned the situation in the eurozone is still a threat, particularly the risks associated with Greece and Spain despite the action of the ECB lowering bond yields, which may have bought politicians time but does not mean Europe is out of the woods yet.He said: “The European Union is solvent, at least in aggregate. By lowering bond yields the ECB has bought politicians time, but they must use this respite to address the structural flaws that hamper growth and leave the banking system at risk.”iShares head of investment strategies EMEA Stephen Cohen added: “For investors who believe that Europe has avoided a crisis, the attraction of European equities is not hard to understand. They are trading at a big discount, both to their history and to other countries.” He said the firm was favouring German, Dutch and Norwegian stocks.