Schroders Quickview: The presidential debate – the scenarios


As the battle for the US presidency continues, Joanna Shatney, Head of US Large Cap Equities, discusses the different potential impacts on the market if Obama wins or loses. If Obama wins….


Joanna Shatney, Head of US Large Cap Equities

            Sign up for our weekly Newsletter and receive the latest ETF and ETC news.
            Click here to register for your free copy 

            For professional investors and advisers only. This document is not suitable for retail clients.

            I am working on the base case that Obama retains his presidential seat. The polls show that Obama has a slight advantage and, whilst this has ebbed and flowed a bit, he has consistently had the upper hand.

            However, the bigger issue is going to be who wins control of the Senate, which is a topic of much debate. While most expect the Republicans to maintain control of the House, neither party is likely to win the Senate by a majority and have complete control. The risk here is that we come out of the election process with as much political gridlock as we had going into it.

            Political gridlock will mean there is not enough time to fix the fiscal cliff by year end – and the consensus view among investors (and we are very much in line with this view) is that negotiations will be pushed out by 6- 12 months.

            The ultimate plan for fiscal reform could take many shapes depending on which party controls Congress – so this is not just about who lives in the White House for the next four years.

            There are three fiscal policy areas which investors need to consider with regard to the potential drag on 2013 GDP. Firstly, the expiration of the Bush tax cuts; secondly, budget cuts (known as ‘sequestration’) to healthcare and defence, and thirdly, increased Medicare taxes that come with the implementation of healthcare reforms. The Medicare tax increases will happen on 1st January 2013, unless Romney wins.

            If Congress does not push out the decision for fiscal reform, and the entire drag of all three areas hits the economy at once, it would have a three-to-five per cent drag on GDP in 2013. But we put that risk below 20%.

            Our view is that there will be between a one and two percentage point drag on GDP in 2013, because of the decision to push out most of Federal fiscal reform. While this is negative for economic growth rates, we think it is manageable, especially given that state budget cuts have already impacted 2012 GDP by a similar magnitude (meaning that the incremental drag is not that large).

            In summary, while there is a view that the market will sell off significantly if Obama wins, we do not agree. We are more inclined to believe that getting the election out of the way is positive for the market, regardless of the ultimate winner.

            Furthermore, a Republican sweep of Congress and the presidential race would mean that greater change is likely, which we think will create greater ambiguity for investors to deal with in 2013, driving up equity market risk premium.

            If Obama loses…

            If Obama loses we hope that we will get some clarity around tax reform. However, this this will take time; a decision is unlikely to be made until the second half of next year. 

            There will also be a great deal of ambiguity for healthcare as Romney has stated he will repeal the healthcare legislation.

            In the case that Obama loses, the market might experience a short-lived rally because there is a perception that Romney would be more ‘corporate friendly’ and likely to prevent tax increases, but we think a rally fuelled solely on the election outcome would stall until we see some resolution around fiscal reform.  Ultimately, we think this will be found, and we continue to look to the improving economic profile of US corporates to drive positive equity returns for 2013 – a more sustainable support for higher equity return than a simple election outcome. This makes the election changes another data point for investors to digest as we wait for real reform – probably a long-term story. 

            Important Information: 

            For professional investors and advisers only. This document is not suitable for retail clients.

            This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this document and these may change. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.
            Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA, which is authorised and regulated by the Financial Services Authority.

            Source: ETFWorld – Schroders Quickview

            Normal 0 14 MicrosoftInternetExplorer4