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The approach of the U.S. fiscal cliff is widely blamed for yesterday's market selloff, but for Canadians there are strong reasons why the supposed crisis is unlikely to require a significant change in portfolio strategy.

First, the political risks for both major parties imply they will be strongly motivated to push for a negotiated settlement ahead of the year-end deadline.

For Republicans, ideology dictates opposition to the $600-billion (U.S.) in tax increases and $500-billion in defence spending cuts that would automatically result if no deal is reached. Across the aisle, President Barack Obama and the Democrats are looking to avoid the blame for the recession that would probably follow tax hikes and spending cuts. According to the Congressional Budget Office, a failure to avoid the fiscal cliff will result in a contraction of 0.5 per cent in GDP in 2013. But holding to the tax-and-spending status quo, according to the CBO, would result in growth of 1.7 per cent.

The potential for recession is obviously a risk for Canadian investors and the domestic economy, but a 0.5-per-cent contraction would amount to a reasonably mild downturn, particularly by the horrific standards set during the financial crisis.

What's more, the United States may still be the preferred option in an ugly global economy. European economies continue to contract rapidly and the economic outlook for China and broader Asia remains murky. That leaves investors with few alternatives.

And patience may pay off. For all the apocalyptic rhetoric surrounding the fiscal cliff, it is also true that U.S. government finances will be vastly improved if the tax breaks end and defence spending is cut.

The Urban-Brookings Tax Policy Center estimates that a failure to avoid the fiscal cliff will trim the U.S. deficit by $3.7-trillion in the following decade. This improvement in government financial health will likely be reflected in a stronger greenback. Investors who run away from U.S. assets because of the fiscal cliff would miss the currency appreciation that could follow.

The most likely outcome of the debate is a painful period of political brinkmanship followed by a last-minute compromise that annoys pretty much everyone while avoiding the worst economic effects of tax increases and spending cuts. Even if markets turn volatile during the process, Canadian investors should sit tight.

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