Markets did not welcome a second term for President Obama with any great enthusiasm. Still, even if Mitt Romney’s election might have brought brief hope of a radical shift in the economic agenda, this reaction may not be as personal as it first appears. The election was simply one hurdle to be successfully negotiated

Once it was jumped, investors were always going to turn their attention to the difficulties facing the US economy.

The first problem Obama needs to address is the fiscal cliff – and he has just a few short weeks in which to do so. The simultaneous expiry of tax breaks and introduction of tax increases and spending cuts at the end of 2012 threaten to knock several percentage points off US GDP. There are also the issues of the eye-popping deficit and stubborn unemployment to tackle.

The US president has made it clear he is willing to countenance tax rises but also stated: “I refuse to accept any approach that isn’t balanced. I will not ask students or seniors or middle-class families to pay down the entire deficit while people making over $250,000 aren’t asked to pay a dime more in taxes.”

In this, he is supported by a number of leading business people – 80 US business leaders signed a letter prior to the election calling for a balanced approach to tackling the budget deficit, including tax hikes and spending cuts. However, the Republican-controlled House of Representatives has said it will block any proposals to raise taxes. Obama undoubtedly has a fight on his hands.

In the meantime the US economy ticks on. After a difficult week, US markets were buoyed a little on Friday by news US consumer sentiment remained at a five-year high. The last set of GDP data was also better than expected and the housing market looks to have bottomed-out.

In general, the signs point to an improving outlook. At the same time, the rest of the world is providing fewer headwinds – the eurozone situation appears more stable for the time being while China’s industrial production, investment and retail sales all accelerated in October.

The dilemma for investors is that, if the US outlook improves, US markets – having been relatively stable and defensive – may not be the key beneficiary. That is more likely to be emerging markets or Europe. Yet, if the US economy dips and investors sell down equities further, having sold all their emerging-market and eurozone equities, the US may well be the next target. US funds have already suffered from the under performance of Apple. Investors will need to be both flexible and selective in their US equity allocation from here.

NOVEMBER 2012