U.S. shutdown could be buying occasion

The U.S. government shutdown that threatens to undermine the global economy over the next quarter is overshadowing the improved growth shown during the summer by the u.S., europe and Japan, but analysts say any prolonged slowdown is unlikely and capital markets will rebound.

Tom Porcelli, chief u.S. economist at rbc capital Markets, said the impasse in Washington surrounding the budget/ debt ceiling — and Obamacare — poses the greatest near-term threat to stocks, but added that any economic disruption will be modest, and investors should be buyers on weakness.

“It may sound perverse, but the longer the government remains dark, the better,” he said.

“We believe the longer the bickering/negotiating (depends who you ask) lasts, the greater the likelihood both the shutdown and debt ceiling issues get resolved.”

barclays capital Markets strategists said if the positive growth momentum persists in the G4 economies — the u.S., the eurozone, Japan and the united kingdom — further gains are likely and investors should be paying attention to the regions and sectors that are likely to benefit the most.

but given the uncertainty south of the border, it’s unclear whether the recent global economic acceleration will continue at its present pace. even if it doesn’t, higher prices for some riskier assets may be inevitable, because analysts have been slow to capture the growth improvement so far.

“This persistent pessimism means that there is scope for asset prices that are linked to growth to outperform as those expectations are revised up,” said Aroop chatterjee and Guillermo Felices in a note to clients. “Admittedly, that repricing has started already in some markets such as eM Asian equities and some risky currencies such as the [Australian dollar].”

They said the effect of a positive 1% shock to G4 growth should lead to at least a 2% pickup in global gross valueadded growth, with the strongest spillovers felt in eastern and Western europe, Asia, Latin America and canada.

The market sectors most positively impacted by a similar-sized shock include construction, which receives an output boost of almost 6%, as well as the basic materials and machinery sectors.

After a weak start to the year, global GdP growth has improved on the back of a manufacturing cycle that recently moved above trend for the first time since 2011.

Gustavo reis, global economist at bank of America Merrill Lynch, expects global growth to hit 2.9% this year and 3.6% in 2014, but is cautious about the potential negative implication that prolonged u.S. uncertainty may have on his forecasts.

“Global GdP growth has been strengthening, but the u.S. political impasse risks throwing sand into the wheels of the global restocking cycle,” he said in a note.

His firm is factoring in a twoweek-long shutdown and cut its fourth-quarter GdP growth forecast to 2% quarter over quarter from 2.5% previously.

That decline isn’t enough to materially impact global growth, but a longer-than-expected shutdown could end up being a headwind to expansion.

“Our expectation is that the u.S. shutdown lasts for another week,” Mr. reis said. “but the risks to this view are skewed toward lingering gridlock.”