For global investors, Fed relief trumps fiscal angst after US poll

Wed Nov 7, 2012 4:32pm GMT

By Mike Dolan

LONDON Nov 7 (Reuters) - The world's biggest investors expect a modest fillip for global bonds and stocks from the re-election of President Barack Obama, as anxiety eases over White House policy toward the Federal Reserve and China.

Even though Obama, who beat Republican challenger Mitt Romney to win a second term, now faces a stiff battle with a Republican-controlled House of Representatives over the looming 'fiscal cliff', investors reckon dissipating uncertainty over Fed policy should be the dominant reverberation worldwide.

The chances of a political deal to avoid $600 billion of automatic tax increases and spending cuts early next year colours all outlooks for now and it will likely rein in any rallies. But most global investors retain a broadly bullish view on what they see as a gradual economic recovery supported by continued easy money.

"It is, especially from a monetary and currency policy perspective, better the 'devil you know'," said Jim O'Neill, chairman of Goldman Sachs Asset Management, which has more than $700 billion assets under management worldwide. "The Republican stance on the Fed and China FX was a bit of an unknown, which unnerved me and would have done so to the markets.

"Hopefully the result will force people to be sensible and compromise a bit on the fiscal cliff issue, but on that I am not quite so confident."

Four years of near-zero Fed interest rates and repeated bouts of government bond buying and money-creation has weakened the dollar and boosted dollar liquidity worldwide, leading to price surges for global equity, precious metals, emerging markets and high-yield bonds.

Since Obama's election in 2008, nominal U.S. GDP rose 9 percent over the period -- but the S&P 500 equity index gained almost 60 percent and high-yield bonds doubled. Emerging market equities jumped 120 percent, emerging market debt funds have gain more than 60 percent on average and gold has jumped 150 percent.

The Romney team's pre-election criticism of the Fed's stance as inflationary raised concerns about whether his victory would effectively veto any re-appointment of Ben Bernanke in 2014 and lead to a more hawkish successor. It also cast doubt on the future of the employment part of Fed's dual mandate on low inflation and job creation.   Continued...

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