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UBS Global Asset Management: Ramifications Of The Potential US ‘Fiscal Cliff’ Dominate Cyclical Market Forum

The UBS Global Asset Management Cyclical Market Forum, held quarterly to discuss three plausible economic scenarios and their potential implications for investments over the next 12 months, found its Q3 Forum dominated by discussion of the US “fiscal cliff”—the impending spending cuts and tax increases that will automatically be enacted next year, unless specific political action is taken prior occur to January 2, 2013. Three market scenarios are proposed at each Cyclical Market Forum and debated by UBS Global Asset Management investment teams with combined assets under management of more than USD599 billion.

UBS Cyclical Market Forum Q3 Economic Scenarios Under Consideration
  • Scenario 1, “Cliff-hanger”: A last-minute deal is struck that preserves many, but not all, of the mandatory cuts and tax increases, leading to anemic 2013 growth, but no recession.
  • Scenario 2, “Temporary step back”: Washington decides to delay the pain by continuing most tax breaks and not reducing spending in 2013, pushing the fiscal problems into the future.
  • Scenario 3, “Free- falling”: With no agreement between feuding political parties, the US falls off the fiscal cliff, leading to a government shutdown, widespread uncertainty and a likely recession.

Each scenario was intensely scrutinized with rigorous debate about both the probabilities of “falling off” the fiscal cliff, as well as the potential impacts of that outcome. Most Cyclical Market Forum participants voted Scenario 1 as the most likely. The discussion focused on how much 2013 GDP would be affected by next year’s prospective spending cuts and tax increases, and how different asset classes would be rewarded or punished depending on the political brinkmanship in Washington. The consensus view was that this issue would not be decided until after the presidential election, although the market effects of uncertainty may have already started.

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