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For global investors, Fed relief trumps fiscal angst after U.S. poll

By Mike Dolan

LONDON (Reuters) - The world's biggest investors expect a modest fillip for global bonds and stocks from the re-election of President Barack Obama, as anxiety eases over White House policy toward the Federal Reserve and China.

Even though Obama, who beat Republican challenger Mitt Romney to win a second term, now faces a stiff battle with a Republican-controlled House of Representatives over the looming 'fiscal cliff', investors reckon dissipating uncertainty over Fed policy should be the dominant reverberation worldwide.

The chances of a political deal to avoid $600 billion of automatic tax increases and spending cuts early next year colors all outlooks for now and it will likely rein in any rallies. But most global investors retain a broadly bullish view on what they see as a gradual economic recovery supported by continued easy money.

"It is, especially from a monetary and currency policy perspective, better the 'devil you know'," said Jim O'Neill, chairman of Goldman Sachs Asset Management, which has more than $700 billion assets under management worldwide. "The Republican stance on the Fed and China FX was a bit of an unknown, which unnerved me and would have done so to the markets.

"Hopefully the result will force people to be sensible and compromise a bit on the fiscal cliff issue, but on that I am not quite so confident."

Four years of near-zero Fed interest rates and repeated bouts of government bond buying and money-creation has weakened the dollar and boosted dollar liquidity worldwide, leading to price surges for global equity, precious metals, emerging markets and high-yield bonds.

Since Obama's election in 2008, nominal U.S. GDP rose 9 percent over the period -- but the S&P 500 equity index gained almost 60 percent and high-yield bonds doubled. Emerging market equities jumped 120 percent, emerging market debt funds have gain more than 60 percent on average and gold has jumped 150 percent.

The Romney team's pre-election criticism of the Fed's stance as inflationary raised concerns about whether his victory would effectively veto any re-appointment of Ben Bernanke in 2014 and lead to a more hawkish successor. It also cast doubt on the future of the employment part of Fed's dual mandate on low inflation and job creation.

Combined with Romney's pledge to label China a currency manipulator, a move that many feared threatened a major trade row with the world's second-biggest economy, there were some nerves in global developed and emerging markets.

Removing these perceived risks, as a result, is seen as a boon to global funds by reinforcing strategies based on long-term monetary policy supports -- even if few were outright bullish and most laced comments with "fiscal cliff" caveats.

"World markets are probably going to take the glass-half full approach unless they are forced not too," said Ewen Cameron Watt, chief strategist at Blackrock Investment Institute, the strategy hub of the giant asset manager with some $3.6 trillion of assets under management.

"So long as we don't get a major fiscal logjam, they will look at a central bank that's now likely to keep its policy highly accommodative into a moderate recovery and that's a reasonable situation for equities."

ROOM FOR COMPROMISE

Cameron Watt reckons the next four weeks of debate on the fiscal standoff are clearly crucial and in that respect the detail of Tuesday's vote as much as the headlines are important.

"There is an argument, looking at the voting patterns and why the Republicans lost with unemployment so high, for them to consider whether they are too far to the right in key battlegrounds and it will be interest whether this has any impact on how they approach the fiscal cliff," he said.

Other fund managers were similarly hopeful, pointing to the 'Simpson-Bowles' panel's 2010 deficit reduction plan as a template both sides could use to reach compromise.

"After a lot of wailing and gnashing of teeth, we are hopeful of a budget agreement along the lines of the Bowles-Simpson proposal which is based on a ratio of 3-1 spending cuts versus tax increases," said Richard Lewis, Head of Global Equities at Fidelity Worldwide Investment, which has more than $230 billion in assets under management.

Phil Poole, chief strategist at HSBC Asset Management, which manages more than $400 billion in global assets, also reckons there will be compromise and that should focus macro election reaction on monetary and trade issues.

"Two major factors that people are pricing in the short term is that Bernanke is here to stay so loose monetary policy and the policy that the U.S. has already committed to will run its course. That's positive for risk assets," said Poole.

"Second, Romney had talked of labeling China as an FX speculator and now that will not happen and that reduces the potential for tension between China and the U.S."

That is particularly true for emerging market debt, which has been one of the best performing assets in the world with gains for 12-16 percent in the year to date.

"As status quo is maintained, the main thesis is that the Fed will maintain QE (quantitative easing) and its 'low for long' policy. That is supportive," said Werner Gey Van Pittius, co-head of emerging market debt at Investec Asset Management.

Van Pittius reckons this will prompt further narrowing of the yield premia on emerging market bonds over their developed market counterparts -- where sovereign emerging dollar debt still has a 285 basis point pick up over U.S. Treasuries and some 550 basis points in local currency.

(Additional reporting by Sujata Rao and Chris Vellacott, editing by Mike Peacock)

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