Nancy Curtin, chief investment officer at Close Brothers Asset Management, looks at which sectors will benefit from Obama's victory
After 18 months of brutal campaign slaughter, more than one million TV commercials and $2.6bn spent by the two presidential candidates, America has decided – Barack Obama will remain President, with a fractured bipartisan status quo in Congress.
It was a marathon race, with even the most opinionated of pundits and pollsters unable to call it clearly on the eve of the election. Although Romney emerged from the first Presidential debate with renewed energy and a more winning centrist image, he was unable to claw victory against the well-oiled incumbent who in final days seemed to masterfully wheel out the campaigning flair that propelled him to victory in 2008.
In the end, he was unable to win the necessary 270 electoral college votes and in fact ended up well behind with 206 votes to Obama’s 303, losing out in almost all the crucial battleground states of Ohio, Iowa, Virginia, Pennsylvania, Wisconsin and Colorado.
Elsewhere the Congressional elections proceeded as expected with Republicans retaining control of the House of Representatives and Democrats retaining the Senate. This continuation of a divided government threatens further gridlock in getting crucial legislation passed through Congress, most urgently a watering-down of the fiscal cliff.
The expiration of the Bush tax cuts and sequestration now loom large and inaction over the budget deficit and the debt ceiling could lead to further downgrades of the US by credit ratings agencies. Obama must grab the leadership mantle to resolve these serious issues, motivating a bipartisan Congress to work together in the best interests of the country, which both parties agree means avoiding the near-term cuts.
Facing ‘unemployment’ himself may have served as the wake-up call Obama needed to implement policies that maintain near-term growth while dealing with the longer term issue of debt sustainability.
With millions of US citizens out of work, the official number of unemployed in the US is 12.3 million and a fragile current state of the economy, the President must move rapidly to prevent the threat of the fiscal cliff, which will cut 4% off GDP next year, plunging the US into recession. The focus for Obama and Congress now must be to encourage growth while implementing credible but more back-ended fiscal austerity measures.
This election has forced both sides to admit that a bipartisan solution to these issues is necessary and sooner or later markets will likely force this newly elected government to adopt deficit reducing cuts similar to the Simpson-Bowles recommendations that he so ineptly failed to enact in 2010.
Romney’s vision was led by his focus on smaller government and the private sector, while Obama is cognisant of the need for growth.
A Keynesian at heart, the President will likely aim to stimulate growth through further government stimulus spending, in the form of spending on infrastructure projects, maintaining subsidies for renewable energy and increasing investment in education and research. He will also use tax increases for the wealthy and cuts in defence to help fund these expenditures and reach the longer-term goal of a balanced budget.
Meanwhile Obama’s re-election points towards continued loose monetary policy and further quantitative easing. This is positive for gold, which came under pressure when Romney, who was critical of the Federal Reserve’s policies, gained in the polls.
Different sectors will face headwinds and tailwinds under Obama as opposed to Romney, particularly within healthcare and energy. The Affordable Care Act (Obamacare) means that 32 million more Americans will have health insurance. This is a positive for hospitals, which traditionally lose revenue from looking after critical patients without cover and will also benefit from increased capacity utilisation and economies of scale. It is less beneficial for certain managed care stocks that have increased regulatory burden under Obamacare.
Within energy Obama understands the opportunity for energy independence and will likely embrace the development of natural gas resources and other fossil fuels, albeit with more regulation as he has expressed concern over the environmental implications of fracking and drilling. He is a big supporter of clean, alternative energy sources and under his presidency there will continue to be government investment into the sector. Meanwhile his regulatory regime will pervade other sectors as well, creating hidden costs for companies just to remain in business. Speaking to companies in the US the one thing they crave above all from government is clarity, stability and transparency. Obama has further work to do in this regard.
Tax reform is the next big issue and the President plans to increase government revenue through higher tax rates for high income families. Estate taxes will increase from 25% to 55% for top rate payers, dividend taxes will go from 15% to 43% and capital gains tax will go from 15% to 24%. Near-term investors may look to take profits and switch from high dividend stocks ahead of these changes, which could accelerate year-end tax related selling.
Historically, equity returns post close election races have tended to be positive at year end, regardless of which party won, but markets do not appreciate uncertainty.
• The election has served as a call to action for Obama and Congress. For us this means the fiscal cliff will be watered down as policy-makers are desperate to avoid a repeat of the fiasco that led to the US’s credit rating downgrade last year.
• Markets will be volatile in the near term as they demand clarity and leadership and will riot further, unless and until, politicians act.
• President John F. Kennedy asked the nation what they can do for their country, but now the nation is asking Obama what he can do for them.
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