The US Debt Ceiling and your Investment.

A US default on its debt and the implication(s) for investment strategies

It’s unlikely that the US will allow itself to default on its debt as the consequences of this on the global economy and financial markets would be massive.?Debt ceiling limits have been in place in the US since 1917 and since then they have had to raise it more than 100 times in order to avoid a default. In 2011 for example, an agreement to raise the ceiling was only reached two days before the deadline. So it’s likely that this time around some sort of agreement will eventually be reached in June. Until then, expect a bumpy ride in markets as investors grapple with the consequences of what a US default could mean.

In the event that no agreement is reached and a default does occur, riskier assets such as US equities and corporate bonds would likely experience the largest drawdowns and liquidity will also dry up. The dollar would also likely weaken significantly. Important to however remember that the longer-term ability of the US to repay its debts is not in question. A default would likely result in a downgrading of the US’s credit rating, but it would still likely retain one of the highest ratings in the world.

In reality risks of this nature can’t be avoided in totality and instead a deeper understanding of these risks and the management thereof is the most appropriate way to navigate the uncertainty.

As proven through history, the best defence against extreme volatility and large short-term drawdowns is to ensure portfolio’s are sufficiently diversified across asset classes, countries, currencies, investment styles and managers, and that the overall solution is aligned to return objectives, risk profile and time horizon. In particular, we advocate for:

The use of skilful smaller boutique managers who are able to be nimble and responsive to the market. These managers are also able to access opportunities in smaller asset classes that some of the larger managers cannot access.

The use of flexible multi-asset solutions that are able to dynamically adjust their asset allocation according to changing market conditions.

A bias towards active funds (over passive funds). Although active funds are a bit more expensive, they tend to really prove their mettle in down markets as they have risk controls in place. Passive funds tend to be concentrated in certain stocks, sectors and countries, and generally underperform active funds in down markets.

?Perhaps the worst thing one could do during highly uncertain times like this is to fall prey to timing the market and letting sentiment drive behaviour and cloud judgement. The opportunity cost and the long term impact on achieving outcomes objectives needs to be considered.

Taking the above noted diversified approach should provide a sense of comfort that there are investment professionals making these decisions on your behalf as well as having a DFM partner probing and getting a sense of comfort with regards to each of the underlying managers views and their positioning.

If you have any questions or queries, please feel free to reach out to us on ?? 011 678 8904 or at www.iwcp.co.za. We will stay on the pulse and pass on any meaningful insights as things develop.

As always, we are in it with you.