Citywire printed articles sponsored by:
View the rest of this gallery online at http://citywire.co.uk/wealth-manager/gallery/a632451
US Election: 15 experts on the implications of Obama's victory
by Dylan Lobo on Nov 07, 2012 at 14:26
After Barack Obama staved off the Mitt Romney challenge to win a second a term in the White House, we collect the views of leading professionals on what the election result means for the markets and the health of the world’s biggest economy.
Cormac Weldon: head of US Equities Threadneedle Investments
President Obama has emerged victorious from one of the most polarised presidential campaigns of recent years. But despite the electoral rhetoric, Obama knows that his scope for manoeuvre in the face of the 'fiscal cliff' and the budget deficit is limited.
He has little choice but to address these challenges (as would a president Romney) by raising taxes and cutting spending. While markets may be volatile post-election, we believe that over the longer term, US equities will gain support from the fundamental strengths of the economy. America is benefiting from a revival in the housing market and an industrial renaissance based on relatively cheap energy supplies. Moreover, capex could pick up sharply (from the very low current levels) once the policy outlook becomes clearer post the election.
In addition, the stock market should benefit from the knowledge that monetary policy will now remain unchanged. Mitt Romney had pledged to remove Ben Bernanke as chairman of the Federal Reserve and was opposed to quantitative easing, which has proven supportive of both equities and the housing market.
Dan Morris: global strategist JP Morgan Asset Management
The two most positive outcomes of the election are firstly, that it appears to be a definitive victory for Obama without the disputes that plagued the 2000 election between Bush and Gore; markets like certainty and they will benefit more from that than the fact that either one candidate or the other was the victor. Secondly, with relatively little change in the makeup of Congress, there is the chance for a resolution to the fiscal cliff before the end of the year.
In the end, however, the fiscal cliff may turn out to be just a distraction. If just a short-term solution is found to the problem, markets should recover fairly quickly. If tough negotiations lead to a drop in equity markets that should be viewed as a buying opportunity; US equities are still fundamentally attractive but valuations are not as good as they were a year ago. The longer term fiscal challenges may have to wait until next year to be addressed. The fact that Obama will no longer be seeking re-election, and the failure of the Republican party to capture the Senate, raises the odds for compromise and hopes that a substantive agreement can be found.
Beyond the election, it is broader economic forces that will determine the path of equity and fixed income markets. The economy is unlikely to accelerate soon as the housing and labour markets recover only slowly. US corporate earnings growth remains challenging. Monetary policy will continue to be stimulative but with a greater impact on asset prices (equities, the dollar, gold), than on the underlying economy. The US is still in a better state than Europe, but both regions face an extended period of fiscal adjustment.
Gary Dugan: Coutts chief investment officer, Asia and Middle East
The immediate reaction to US President Barack Obama winning a second term has been a modest rally in equities and broad weakness in the dollar. The latter probably reflects a consensus view that the Fed is more likely to keep monetary policy looser for longer under a second Obama administration than would have been the case under Republican rival Mitt Romney.
US equities may continue to rally, assuming the lack of reaction to recent strong economic data was due at least in part to uncertainty over the election result. However, gains may be capped by concerns that Obama may struggle with a divided Congress to avert the year-end 'fiscal cliff' of tax hikes and spending cuts.
Concerns that Federal Reserve (Fed) Chairman Ben Bernanke would have been under pressure to leave his post in early 2014 under a Romney Presidency have been removed. This is negative for the dollar, on the assumption that quantitative easing will remain in place in its current form for a considerable period. However, in terms of the impact on the dollar against other major currencies, this will be offset by similar measures undertaken by other major central banks.
Although there is likely to be volatility in coming weeks associated with negotiations on the fiscal cliff, we believe that the most likely outcome is the President and Congress agree to delay or reduce the magnitude of tax hikes and spending cuts scheduled to take place early in the New Year.
Martin Reeves: manager Legal & General High Income Trust
In many ways the election result did not matter. Regardless of who is holding the reins, the US faces huge deficit and debt problems. While I see no immediate danger of increased bankruptcies, the default cycle is entirely dependent on how the US deals with these massive fiscal challenges.
For that reason, it makes sense for high yield funds that have the capacity to look globally to find yield outside the US. In High Income Trust, I am underweight US names and favour emerging markets, where high yielding companies look more resilient, while still allowing me to pick up yield.
Mike Jennings: manager of Premier Global Strategic Growth fund
With the world economy still teetering, the US election proves that the incumbent can win despite high unemployment and a tightening fiscal noose. Given that equity markets do not like surprises and change, a returned president will be greeted with modest relief. Problems are far from resolved though.
With over $1 trillion of annual budget deficit for four successive years, and $16 trillion of national debt, there is a clock ticking. With the Republicans extending their control of the House of Representatives, the US administration will find itself in policy gridlock. The “fiscal cliff” looms at the end of the year whereby $600 billion of automatic tax hikes are scheduled. At approximately 4% of US GDP, such an event would immediately trigger recession globally. Markets assume that it will not come to pass but, now that the election is out of the way, I suspect that there will be increasing focus on this for the next two months.
Nick Cowley: co-manager of the Henderson Horizon American Equity fund
Obama’s victory does provide stability, particularly with respect to the Federal Reserve, and thus the risk of Romney meddling with Ben Bernanke’s loose monetary policy can now be eliminated. However, the biggest domestic issue facing the president is the upcoming fiscal cliff, a series of tax increases and spending cuts that are due to come into force at the end of the year. In the final presidential debate, Obama said that these spending cuts would not happen, and general consensus is that many of the tax increases will be pushed out to be potentially dealt with in a broader fiscal reform package.
For the markets, this is critical. The recent quarterly earnings reports from US companies have highlighted that the fiscal cliff is freezing the decision making process and thus holding back capital spending and new job creation. This runs the risk of derailing the positive progress that the US economy is making, with notable signs of recovery in both the housing and auto sectors. Avoiding the fiscal cliff would allow this progress to continue and result in a compelling outlook for US and global markets.
Richard Lewis: head of global equities at Fidelity Worldwide Investment
On the basis that the US election has resulted in status quo in the White House and in Congress, politicians on both sides should now get on with resolving the issue of the budget deficit reduction. With the balance of power remaining the same, there is no excuse for delay.
We will see some very intense negotiations pre-Christmas around the budget deficit and the negotiating stance of the two parties will start off poles apart. The Republican House of Representatives made it clear that it will block any tax increases while president Obama has intimated that if he cannot get satisfactory movement from the Republicans that he will consider driving over the fiscal cliff.
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. The budget issue is very important as we have already seen a very significant slowdown in corporate spending while chief executives wait for a resolution to this issue. Q4 activity levels will be low as a result and this will be exacerbated by the impact of Hurricane Sandy. On the basis that there will be a resolution before the first of January, we can expect a decent bounce-back in both economic activity and confidence early in the new year.
Simon Edelsten: manager of Artemis Global Select
Without evidence so far of a big swing on the overall vote to the Republicans (we only know the balance of electoral college votes) it may be awkward for the House (Republican dominated) to threaten too much on the 'fiscal cliff' against a freshly elected President – this could look undemocratic. Also last year’s ‘fiscal cliff’ dramas had a large element of pre-election posturing – trying to make Obama look out of control. He is now in control for four more years so the Republicans have less to gain from brinkmanship – though no doubt there will some Punch and Judy before it’s all over.
The key investment conclusion is that the US continues Quantative Easing and continues with Bernanke at the Fed and Geithner at the Treasury. In the Artemis Global Select fund we have added to our US bank holdings, Wells Fargo, Suntrust and PNC where Federal purchases of distressed mortgage assets lower banking risk. Last weekend’s surprise news that Bank of America – too shaky a bank for us – may be returning to paying dividends illustrates how rapidly the US banks have returned to profitability and contrasts sharply with prospects for European banks. We also have a large holding in Capital One – the credit card operator which is already benefitting from improving job security.
Recovery may be coming slowly, but it does seem to be coming and the rebuild after Super-Storm Sandy may also stimulate the economy. We own Intuit, the leading software company helps smaller businesses manage their finances and Oracle the dtatbase giant, both geared to recovery. Banks lending again aid the recovery in the housing sector – the 2008 banking crisis was heralded by falling property prices. We have recently bought holdings in Dow Chemical – building chemicals are a big component – and St Joe, the largest land holding company in Florida which is restarting development of retired communities in the sun for the growing numbers of wealthy retirees of the Northern US.
Obama rather than Romney also means less risk of a trade war with china. Much of our non-US portfolio is in South East Asian stocks which would benefit from a recovering USA.
Valentijn van Nieuwenhuijzen: head of strategy at ING Investment Management
The combination of an Obama win and divided Congress was our and the market's base case expectation and is therefore not expected to have a major impact on market sentiment. It does take away some uncertainty (risk of a dead heat and legal challenges, future of Fed policy under Romney), but keeps the uncertainty over the fiscal cliff negotiations later this year very much alive.
Basically, the pre-election status quo is maintained because of which there remains a high risk of a stalemate between the Republicans and the Democrats in the US Congress. Our base case remains, however, that the fiscal cliff will be avoided because it is not in the interest of either party to induce a recession. We expect a compromise to be reached that results in a little over 1% of fiscal tightening in 2013.
One important source of uncertainty has now been removed, however. The probability that, in early 2014, Bernanke will be replaced by a new chairman who is intent on tightening sooner than later has fallen substantially. The effectiveness of US monetary policy rests crucially on the Fed's commitment to keep loosening until the real economy will have gained substantial traction. Hence, because of the Obama win, the credibility of this commitment remains very much intact.
Ted Scott: director global strategy, F&C
Markets have responded positively to Obama’s re-election mainly because it means that the Federal Reserve has a clear mandate to continue its aggressive monetary easing policy unchecked. The 3 tranches of QE that the US has implemented since the global financial crisis began have, more than anything, been responsible for the rise in risk assets since March 2009 despite the continuing high levels of debt which caused the crisis in the first place.
If Romney had won it is likely the threatened removal of the abundant liquidity stimulus would have given markets pause, notwithstanding the Republicans’ reputation for being pro-business and markets. However, of more immediate consequence will be the resolution of the fiscal cliff and for this it depends on how constructive the attitude of the Republicans is since they still retain control of the House of Representatives.
As the tussle over raising the fiscal cliff proved last year the relationship between the 2 parties could make for some tense times in the 7 weeks that are left to find a solution.
Tim Drayson: senior economist, LGIM
The election result matched our expectation, even if it was a bit more conclusive than we had anticipated. Attention now turns to the fiscal cliff, where a decision is really needed before Christmas. The problem is that the Republicans have a strong grip on the House of Representatives and the two parties clearly polarised. What we need is cooperation, but the political wrangling could get ugly. We still expect fiscal tightening of around two per cent, which will materially effect the economy.Michel Canoy: manager Legal & General Managed Monthly Income Trust/Fixed Interest Trust
There has been no change at the helm, and that is good for stability, but in truth the election result doesn't materially impact my forecasts. I remain underweight US corporates across all my portfolios, as the risks of the fiscal cliff on US growth have not been priced into US credit markets.
Where I do have exposure to the US, I favour companies with geographically diverse revenue streams. The fiscal cliff might unsettle markets for the next few weeks, but I cannot take my eye off the euro zone periphery. How these two threats play out will determine how bond prices react in 2013.
Andrew Cole: investment manager Baring Asset Management
We continue to believe that yesterday’s verdict equals a degree of certainty within an uncertain economic environment. Though the market is generally content with a clear mandate and a result, importantly, without the recount scenario of the 2000 election, it needs to be put in to the wider context of doubt over whether the looming ‘fiscal cliff’ will be sorted before the year is out.
Certainly attentions should now be firmly focused on the fiscal cliff - the potent combination of spending cuts (of around US$600bn) and higher taxes which, in the absence of concrete action from Congress, will automatically take effect next January. According to estimates by the Congressional Budget Office, without resolution of the fiscal cliff, the US economy could contract by as much as 0.5% in 2013. Worryingly, we believe this figure is actually on the conservative side but whatever the figure, the US will have been thrown back into recession, once again.
What we still have is a continuation of what we’ve seen in the last two years, namely, divided government basically along the lines of Mr Obama in control of the White House, the Democrats continuing to retain control of the Senate, while the Republicans stay in control of the House of Representatives. In his victory speech, Mr Obama said he would talk to the opposition about 'where we can work together to move this country forward' and this, on the face of it, is broadly encouraging.
We feel the pressure has intensified on Congress to find a solution to the gridlock and have more certainty on fiscal policy. The best-case scenario which would we believe inject much-needed confidence into the market as we head into 2013, would be a framework deal – a broad bipartisan deficit agreement. This is where over the next two months, both the Democrats and Republicans agree to general targets for revenue increases and spending cuts plus new tax terms and then work out the details six or nine months down the road. However, we continue to forecast that Congress will manage to avoid a looming fiscal cliff by December 31, by most probably reaching an agreement on extending some tax cuts coupled with, possibly, reduced spending on areas such as Medicare and Medicaid.
Mike Turner: head of global strategy and asset allocation Aberdeen Asset Management
If president Obama endured a tough re-election campaign he has greater challenges ahead. These include the simultaneous expiry of tax breaks with the introduction of tax increases and spending cuts at the end of 2012; the so-called ‘fiscal cliff’. At the same time the president has to promote growth and deal with stubbornly high levels of unemployment.
There are positives with some economic data points picking up and the fact that corporate America is in generally good shape with cash - around $1,700 billion - on the balance sheet. However, for company CEOs to be persuaded to spend this money President Obama needs to show leadership and that the economy is moving in the right direction. The challenge for him here is that Congress is divided with the Republicans holding the House of Representatives and the Democrats the Senate. Just as in his first term President Obama is likely to struggle to implement all his policies.
The global economy needs the US to recover. Despite China's emergence, America remains key to the financial health of economies around the world. Stockmarkets may react positively to President Obama's re-election as it offers continuity (particularly in the Federal Reserve) and reduces uncertainty. However, longer term all eyes will be on whether the President can address the country's debt problems, restore business confidence and provide the seeds for growth. All big challenges.
Keith Wade: Schroders chief economist and strategist
It remains our view that a compromise will emerge as neither side wants to be blamed for plunging the economy back into recession. Furthermore, there does seem to be a general agreement on extending the Bush tax cuts (which represent more than $200 billion of the fiscal cliff). The difference being that Obama would not extend the cuts to the wealthy, resulting in an extra fiscal tightening of around 0.5% GDP.
It is not just the scale, but the detail of the fiscal package that will be important. Uncertainty over the tax code may be a factor behind the fall in corporate capital expenditure in the US, and businesses will be looking for clarity if they are to resume spending. Equity investors will also be keen to see how proposals to increase dividend and capital gains taxes from 15% to 43.4% and 23.8% respectively play out.
The difficulty is that time is limited, with an agreement needed in the short six-week post-election period before year end. Given what we have seen in the past and in Europe today, politicians will want to take any agreement to the wire.