Investment Strategy

INVESTMENT STRATEGY

Strategic Insights
January 2013

Fiscal Cliff Update
Our thesis heading into 2013 was that greater transparency on the fiscal front would help unleash underlying cyclical momentum and spark a long-awaited reallocation of capital for both businesses and investors. The “baby grand” fiscal cliff deal passed by Congress on New Year’s day was a step in that direction, in our view. The next phase, which will be centered around the debt ceiling negotiations, should include spending cuts that are needed to help solve the longterm fiscal problem and create a more “balanced” grand bargain. Bouts of market volatility are likely to come and go as the debates continue. We would view downside volatility as an opportunity to increase exposure to our top investment themes throughout equities and real assets.

FISCAL CLIFF Q&A
What does the agreement to avert the fiscal cliff look like? What are some of the highlights?
The core of the 2012 Tax Act once again extends “most” of the so-called Bush tax cuts, but not all. The 2012 Tax Act will permanently extend existing taxable income tax rates for all single taxpayers with taxable incomes below $400,000 and married couples with incomes below $450,000. The top marginal income tax rate increases to 39.6% from 35% and the top marginal dividend and capital gain tax rates rise to 20% from 15% on investments held for more than one year. Adding in the 3.8% health care tax results in an even higher effective rate. Additionally, various tax deductions and credits phase out for individuals earning more than $250,000 and couples making more than $300,000. The agreement also extends unemployment benefits for one year, delays automatic spending cuts for two months, raises the estate tax rate to 40% from 35% with a $5 million exemption, indexes the Alternative Minimum Tax (AMT), extends accelerated depreciation allowances for businesses for another year, renews the research and development (R&D) tax credit and extends...