With the 2012 US federal election votes counted and the question of who will take residence in the White House settled, commentators have moved on to the next big question: what an Obama second term may mean for the global economy and markets.
John Birkhold, based in Sydney, is a partner of Origin Asset Management (‘Origin’). He is a member of Origin’s global investment team and is responsible for developing Origin’s business in Australia and the Asian region. Origin is one of Principal Global Investors’ boutique fund management partners.
According to Mr Birkhold, in addition to the looming issue of taxation reform, a number of areas are worthy of investor attention. Likely upcoming activity in the banking and healthcare sectors are among them.
“One place to start is the likely effect of a Democrat victory on banking policy and the flow on effects of that,” said Mr Birkhold.
With four more years of an Obama administration now a certainty, Mr Birkhold pointed out that Federal Reserve Bank head, Ben Bernanke, should have the choice of staying on – and if he does, that the Fed may well continue the Bernanke policy of retaining unprecedented control of both ends of the yield curve.
“By that I mean explicit control in the short term through setting interest rates, but also in the longer term through purchases of the majority of US Treasury bond issues,” explained Mr Birkhold, “The net result of such a policy may well be a continuing of the four-year trend in favour of ‘hard assets’ such as gold and silver, a possibility that investors may wish to consider as they plan for the future.”
The Democrat win also ends speculation regarding the future – and potential unwinding – of major pieces of legislation such as the Dodd-Frank banking reforms and the institution of the so-called ‘Obamacare’ healthcare reforms.
“With both now emphatically here to stay, there’s no more holding back or uncertainty. For many investors this means it’s time to consider their potential practical implications,” said Mr Birkhold.
When it comes to Dodd-Frank, Mr Birkhold said that investors may wish to factor in a possible dual result: a fall in share prices as the banks are forced to divide their operations between their lending and deposit taking and investment arms; and, conversely, an increase in profitability due to the flow-on effects of Bernanke retaining his position and associated policies.
“Some investors and commentators may argue that the falls in bank share prices are a knee jerk reaction that’s counter to the longer term profitability outlook and as a consequence may be looking closely at buying opportunities,” said Mr Birkhold.
On the healthcare front, investors are also confronted by a mixed bag of possible outcomes.
“In the first instance it does seem that there will be winners and losers as Obamacare unfolds. In the near term there are concerns that insurers will be feeling strain as they are forced to bring on a large number of the uninsured with potentially questionable risk profiles,” explained Mr Birkhold. “Because of the tax funding model of Obamacare, medical device companies are also likely to feel the pinch as higher taxes to fund the initiative come on stream.
“On the other hand, you have those hospital companies that no longer have to bear the losses of taking on non-paying patients and may therefore experience an uptick.”
Mr Birkhold then observed that, lying somewhere between these camps are the pharmaceutical companies, which while likely to experience increased demand as a result of wider funding of healthcare needs, may also feel the effect of the consequent inflows of cheaper, generic products.
“All of this will of course be taking place against the broader backdrop of Congress’s attempts to come to some kind of compromise in relation to taxation reform and the so-called ‘fiscal cliff’,” concluded Mr Birkhold.
“The fact is that there has been no meaningful tax reform in the United States since 1986. There is now a real opportunity for much needed reform and simplification of an extraordinarily complex and burdensome body of law. If there can be no agreement, we will be looking at four more years of uncertainty. Hopefully, wiser heads will prevail.”