Investors brace for US debt gridlock

Hang tight and look for buying opportunities. That's the advice some analysts are giving their clients despite growing nervousness in financial markets as political gridlock in the US threatens to spill over into a debt-ceiling battle.

Global markets, including the Asian region, slipped into the red on Friday as financial leaders warned that a US default on its debt obligations could wreak havoc on the US and global economies.

The benchmark S&P/ASX 200 Index shed 26.9 points to close at 5208 points, recording a 1.9 per cent loss for the week.

Analysts said there would be a period of volatility in financial markets as the US government shutdown dragged on and the political battle turned towards Congress raising of the country's debt limit. Even so, they expected any tussle over the debt ceiling to be resolved eventually but potentially leaving the US economy weakened.

"You will see a growth shock because there will be fiscal austerity resulting from this any way we cut this, and so slower growth is usually consistent with lower bond yields," said Credit Suisse equity analyst Damien Boey, who advised investors to look into buying bonds or bond proxies.

Bond proxies, such as consumer staple companies, utilities, telcos and some REITs, would be attractive during this period of volatility, Mr Boey said. Gold and local larger-cap resource stocks could also prove to be good investment options.

"Larger-cap resources stocks are trading at a considerable discount to earnings ... so even if commodity prices fall, they can absorb that. More than that, they have room to be re-rated from a valuation perspective," Mr Boey said.

RBS senior trader Luke McElwaine said while investors had to remain cautious, there were buying opportunities in the Australian share market, which had remained fairly robust despite the growing jitters around the world.

"We tend to see this as an opportunity rather than a sellout. There's probably a decent rally on the back of this," he said.

"There's some pretty good fully franked dividends on offer in November for ANZ, NAB and Westpac. So ... it's probably not a bad time to be buying some of the good-quality companies, like the BHPs, that have been beaten up over the past 12 to 18 months."

Looking beyond short-term volatility, expectations remained for the global economy to continue to recover after the political tussle was resolved, JBWere executive director Mike Kendall said.

"Europe looks like it is stabilising and Bernanke's tapering is in response to the US economy strengthening. China looks like its economic momentum is going to be a little bit better than the market was expecting, and that could be more positive for commodity prices than expected," he said.