Yet it seems markets will tread warily over the coming weeks, awaiting political developments on the US fiscal cliff.

Let’s hope common sense prevails, though some anxiety is warranted with memories of the 2011 debt-ceiling debacle still fresh.

If nothing else, it would be a shame to see the gradual progress the US economy has made of late come unstuck.

Indeed, the focus could be decidedly different with a gradual rise in US house prices and consumer confidence, in turn, at five-year highs. Employment has also been on the mend notwithstanding the recent impact of super storm Sandy.

Though when it comes to dangerous precipices, it seems the US is not alone.

Competitive predicament

Recent comments from Woodside and NAB Chairman, Michael Chaney, caution Australia faces the prospect of its own “growth cliff” sometime after 2015.

In a post resources boom era, Australia risks the possibility of slower economic growth unless productivity can be substantially lifted. Chaney warns that future projects and jobs are likely to go offshore. Recent cost blowouts in the LNG industry highlight Australia’s competitive predicament.

His comments expand on the Reserve Bank’s own expectation of an earlier and lower peak in the ‘resources boom’ and begs the question on whether future interest rate cuts remain in store.

Not withstanding the recent December cut, expectations do remain for more relief in 2013.

For many investors, this will further depress already frugal returns on term deposits and cash investments.

Despite resilient equity markets, investors continue to give the asset class a wide berth. Yet relative to other investments, the risk premium on offer remains attractive, as does the income available.

It seems unlikely that lower rates alone will bring investors out of their cash hibernation, though a satisfactory resolution to the fiscal cliff should remove one obstacle and improve sentiment.

Taking the plunge

Both the US and Australian economies have time to sensibly deal with their challenges. The thought of standing on a precipice is neither enticing nor recommended.

And while markets will remain preoccupied with cliffs in the immediate future, other risks should not be forgotten.

In a low interest rate environment, investors will need to re-examine their sources of income. For those who remain sceptical of equities there are ways to avoid the pitfalls.

The use of options can provide some downside protection and enhance already attractive levels of income.That sounds like a plunge worth taking.

Patrick Noble is a senior investment strategist at Zurich Investments.
10th December 2012
Source:  Professional Planner    http://www.professionalplanner.com.au