UK vs US recovery - is either approach working?

Old Mutual Asset Manager’s Stuart Cowley and Fidelity’s Trevor Greetham have clashed over the success of the measures being undertaken to aid the recoveries in the UK and US.

Cowley, OMAM's head of fixed income, said the UK coalition government's austerity package has been too lenient and could result in the market losing confidence.

"The currency markets tell you everything you need to know about how subdued the UK recovery is, with sterling at a low level against the euro," said Cowley.

Cowley said reducing expenditure by 4% a year was nowhere near enough to gain the confidence of investors.

"The UK initially bought the confidence of the market with the spending reduction but with the cuts being nowhere near severe enough there is a danger the market will lose this confidence. They will not continue giving anaemic growth the benefit of the doubt."

He added with CPI inflation currently standing at 4.5%, the UK's approach had eroded any value in gilts.

"A two-year gilt yield is 0.75% and with inflation as high as it is this tells you fundamentally there is something very wrong with the government bond market."

In stark contrast Greetham, Fidelity's director of asset allocation, said the coalition cannot take further action while consumers face a number of headwinds.

"With the average consumer's income being squeezed, coupled with rising commodity prices, it is difficult for the government to get the fiscal policy moving any quicker," said Greetham.

He added the UK market had sold off to sharply and he expected it to climb from here.

"The market is overly depressed and will rise in the short term as equity sentiment is far too downbeat."

He also called for further quantitative easing - something the Bank itself is looking at - to boost markets.

"The government should inject more QE and then we will see the market rally at the end of the year, just like it did in 2010."

Turning to the US, which has to deal with its deficit in a different way to the UK because of its size, the managers were once again divided over the approach taken.

Greetham said the US's emphasis on growth, achieved by easing monetary policy, has paid off from an equity market perspective.

"The pro-growth stance has made US equities attractive and I take the view they have made the right move by easing their fiscal spending cuts," said Greetham.

"Until wage inflation spirals out of control the US should continue its growth emphasis by injecting QE3 into the economy, as if they change their stance and introduce tough spending cuts unemployment will climb."

However, Cowley disagrees and views the US's policy as "grotesque", with soaring debt levels pushing up the real rate of annualised inflation to 7%.

"The US fiscal policy is grotesque with the country addicted to spending other people's money and as a result savers are being punished as it is driving up inflation, which is more realistically around 7%."