Threadneedle’s Weldon warns of US growth slump

The US’s upcoming ‘fiscal cliff’ of tax increases and spending cuts could knock 4 percentage points off its GDP growth and push it into recession if not dealt with properly, Threadneedle’s Cormac Weldon has warned.

Mr Weldon, who runs the £1.9bn Threadneedle American and £1.6bn Threadneedle American Select funds, said he believed a deal would be reached to reduce the fiscal cliff’s impact by the end of 2012.

Tax cuts and other fiscal policy measures introduced by president George Bush in 2002 will expire at the end of this year, meaning individuals and companies could be hit with sudden tax increases and government departments could be forced to slash spending.

Mr Weldon said the US government was also still facing long term problems with its budget deficit, primarily driven by healthcare entitlements. He warned healthcare costs would still be a major issue even if the Republican party successfully repealed president Barack Obama’s healthcare bill, which requires all US citizens to have health insurance.

The manager said: “The Democrats say they will only deal with tax increases, while the Republicans want to slash entitlements. They have different philosophies and we are not seeing a sensible debate because it is an election year.

“It’s correct that the fiscal cliff, if not dealt with, would push the US into recession but its effect will be reduced. Over time there will have to be austerity, tax increases and spending cuts, but it will not be as severe as if implemented next year.”

Mr Weldon also pointed out that the country’s debt ceiling would need to be raised again in the near future. Political deadlock over increasing the US borrowing limit last summer led to Standard & Poor’s cutting the country’s AAA debt rating, and preceded a sharp stockmarket dip.

“The question is: do we get another fiasco like last year when the debt ceiling wasn’t addressed until the last minute?” the manager added. “That is a possibility. I would be concerned if the bond market began to sell off because long term concerns had not been addressed, but politicians may get more time to deal with it.”

Mr Weldon has made few changes to the fund in recent months in spite of his macroeconomic concerns, instead holding more than his benchmark in domestic consumer stocks. He also said media companies such as CBS were profiting from a continued increase in the amount of television being watched in the US.

The American fund was top quartile over five years to July 2 according to Morningstar, posting a 35.6 per cent gain compared with an IMA North America sector average 18.4 per cent return. The American Select fund also outperformed the sector, posting a 29.6 per cent return over the period.