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.”

The post What the US election result may mean for investors appeared first on AdviserVoice.

Not that it would have been much different if Romney had won but without Senate control.

Uncertainty regarding who will be the next President is out of the way (assuming no challenges), but in reality its more of the same with attention now turning to solving the fiscal cliff and on this front negotiations are likely to be difficult and protracted and the Republican controlled House may dig its heals in (particularly if Obama wins the presidency but without winning the popular vote – as I write though is he is ahead on the popular vote). 

Ultimately I think a compromise will be reached and the fiscal cliff will be cut back from a recession driving 4.3% of GDP as per current law to something more like 1.5 to 2% of GDP which will enable the US economic recovery to continue. As a result share markets may see a bit of a bit of uncertainly until some resolution regarding this is in sight.

To read the analysis of the election outcome, click here.

The post Obama wins – likely economic outcomes appeared first on AdviserVoice.

• The November 6 US Presidential election has more significance than usual given the policy differences between the two candidates and urgent need to reduce the “fiscal cliff” that will be reached on January 1.
• Ultimately the “fiscal cliff” is likely to be averted, helping a continuation of the rising trend in shares, but uncertainty around it & the approaching US debt ceiling could contribute to a bit of nervousness over the next few months.
• Mitt Romney’s business friendly policies would seem to be more positive for the share market, but bear in mind that historically US shares have performed better under Democrat Presidents and Romney’s commitment to not reappoint Fed Chairman Bernanke in January 2014 when his term expires is a possible negative.

To read this edition of Oliver’s Insight, click here.

The post Oliver’s Insights – the US election appeared first on AdviserVoice.

Ironically, the state of the American economy and stock market could influence the election outcome. In the past, the lower the level of inflation and the higher the level of economic growth, the greater the incumbent’s share of the votes has been.

There is a common perception that the Republican Party is more pro-business, deregulatory and tends to support lower taxes and takes a more limited role in governance. The Democratic Party, on the other hand, is seen as more willing to regulate business, support higher taxes and play a more active role in government. The implication is that a Republican outcome should be better for stock markets.

However, the evidence does not bear this out. Over the past twelve elections spanning 48 years, the S&P 500 has delivered a higher average annual return under the Democrats.

At present, spread betting markets have offered relatively accurate predictions for the outcome of recent elections. The market odds for Barack Obama being re-elected continually fluctuate and these odds are very well correlated with the performance and level of the S&P 500. The latest (Intrade) odds of 57% (as at 4 September) suggest Obama will win. Any material fall in the US stock market would hurt Obama’s chances.

Some academics have theorised a link between business cycles and election cycles. Since the 1960s, the US economy has experienced seven business cycles with an average length of 75 months, or a little over six years. Unfortunately, this theory is not borne out in reality. Similarly, history shows that unemployment is a relatively poor predictor of election results.

Whichever party wins the US election, they will have some hard economic work ahead of them.

Future challenges – the fiscal cliff
Tackling what has been labelled the fiscal cliff in a way that does not do further damage to an already weak US economy is the biggest challenge faced by the next administration.

They will have a choice; they could let sequestration kick in, which will indiscriminately see tax increases and spending cuts across the board. The Congressional Budget Office has estimated that this would see the US economy shrink by 4% in 2013, which makes this an unpopular option. At the other extreme, cancelling the automatic tax increases and spending cuts would stoke the US budget deficit and perhaps lead to a further sovereign rating downgrade.

The Republicans want to cut spending significantly and avoid raising taxes, while the Democrats want more limited spending cuts combined with tax increases.

An ideal outcome would be to phase in tax increases and spending cuts over time, and target cutbacks in areas where the economy is least sensitive, to minimise economic damage. While both parties want to avoid the ‘fiscal cliff’, finding an agreeable compromise on the issue will be difficult.

If Congress fails to find a solution to the fiscal cliff, spending cuts and tax hikes will be enacted indiscriminately across the board under sequestration.  And this could be extremely damaging if it adversely affects the most productive areas of the economy.

This becomes a higher risk if a clear election outcome is not achieved.

The market after the election – sector specific
How the US stock market performs after the election is also of interest to investors. History tells us that the stock market is likely to rally if the incumbent wins re-election. But, empirical evidence also suggests that the US stock market has historically delivered its strongest returns on the third year of an election term. This effect might be tied to the incidence of government spending within the presidential cycle, as most government expenditure occurs during the first and second years of an election term.

The biggest stock market effects this time, however, will probably be felt at a sector level – healthcare, financials and defence are sectors likely to be most affected by the election result.

Healthcare – the Affordable Care Act that was passed in 2010 (dubbed ‘Obamacare’) was designed to give 30 million of the poorest Americans access to healthcare. Opposed by the Republicans, it was criticised for being uncompetitive, inefficient, expensive and bad for the healthcare industry. They have challenged its legality as it makes buying healthcare insurance compulsory. The Act also expands the safety net of Medicaid, which provides healthcare for the poorest Americans. The election outcome is a key battleground that will have deep ramifications for the healthcare sector.

If Obama wins, companies that support Medicare and Medicaid should benefit, including pharmaceutical companies. It could also be supportive for jobs as additional hospital staff would be needed to cope with increasing patient numbers. Private health insurance companies would probably lose out.

If Romney wins, he may try to repeal the Act and replace it with an alternative. Companies from a variety of sectors that have lucrative contracts supplying Medicare (for the elderly) and Medicaid (for the poor), could be adversely affected. Pharmaceuticals would be negatively affected because there would be fewer medically insured people. Private health insurance companies on the other hand, would probably benefit – taxes, fees and regulation under the Affordable Care Act would probably be dismantled.

Financial reform – the Dodd-Frank Act passed in 2010 is the main financial service reform proposed by the Obama administration. However, it is complex and it has been difficult to implement. Romney has already vowed to repeal the Act if he is elected, criticising it for being overly burdensome. A repeal of the Act is unlikely, however. Wall Street firms have spent a huge amount of time and resources adhering to the new rules, so reform is still more likely than repeal under Romney.

Despite his threats, even the controversial ‘Volcker Rule’ that bans banks from proprietary trading probably is unlikely to change under Romney. Such a move would be politically unpopular following recent bank scandals. However, Romney would have influence over the Financial Stability Oversight Council, benefitting non-bank financial companies, such as asset managers and insurers. If Obama is elected, plans to shift OTC derivative contracts onto exchanges would benefit the clearinghouses.

Defence – attempts to cut programs, such as missile defence under Obama, would require strong Democratic control of Congress and polls suggest this is unlikely. If the Republicans take control of Congress, defence cuts would be tempered, even under Obama. Many companies could benefit under both Obama and Romney, which is a reflection of the geopolitical tensions that still pressure US policy at present, not least in the shape of the Iran-Israeli nuclear crisis.

Firms that specialise in drone aircraft for military surveillance are likely to benefit regardless of the outcome. Funding the development of cyber security also enjoys bi-partisan support. Additionally, US defence companies will also benefit from equipping the depleted weapon inventories of close NATO allies.

If Romney wins, it is likely that he would support weapons exports to compensate those contractors adversely affected as wars in Iraq and Afghanistan wind down.

A contentious point, many analysts feel that a Romney victory would be more likely to bring about military conflict than an Obama one, presenting a potential boon for the defence industry.

In conclusion, the evidence suggests that the state of the US economy going into an election can influence the votes of swing voters and help to determine an election outcome.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

The post The US election and the markets appeared first on AdviserVoice.