How will the US election affect markets?

Wall Street

Investment experts have been giving their opinions about how a Romney or Obama win in the presidential election could affect markets and alter prospects for US companies as well as the US economy.

Republican Mitt Romney faces Democrat incumbent Barack Obama in a race that according to pollsters is too close to call. Around 30 million Americans have already cast their vote today.

US economy

According to Tom Marsico, co-manager of the Henderson US Growth Fund, a Romney victory would generate more confidence in the US economy. "I would expect the growth rate of the economy to be slightly higher."

However, he adds that an Obama re-election would provide "some clarity regarding financial rules and would allow business to operate with more certainty".

For his colleague, Bill McQuaker, head of multi-asset at Henderson, a Republican win could mean fatter dividends from US companies.

He explains: "There is a massive amount of cash – estimates reach $700 billion – currently held offshore by US companies with overseas earnings. The tax code is such that it is currently disadvantageous for US companies to bring that money onshore.

"One possibility is that if the Republicans win the election they might be willing to grant an amnesty, so that cash can come onshore without generating a tax liability. This could have positive implications for stock buybacks, dividends and even domestic US investment."


Stephen Barber, who advises Selftrade on economics and markets, calls Obama the "continuity candidate' and Romney the "pro-business' candidate, meaning having either of them as US president won't necessarily be bad for markets.

He says when the winner of the election is announced, equity markets will rally, as 'markets like certainty', but the longer-term impact of the new president on the markets is "perhaps more muted".

According to Barber, US healthcare and defence companies could be most affected by the election result and the president's policy pledges. For example, Romney has promised to increase military spending by $2 trillion, which could create orders and boost the share prices of US defence firms.

While a Romney win may be considered good for US equities, Stuart Frost, head of RWC's absolute return bond and currency team, says an Obama victory should be positive for bonds. "At least in the short term an Obama victory should be positive for bonds (no change in Fed policy and potential gridlock over the fiscal cliff)."


Jenna Barnard, co-manager of the Henderson Strategic Bond Fund, elaborates on this point, saying that a Republican win risks changing the US Federal Reserve policy.

Current chairman Ben Bernanke will likely step down from his role in early 2014 and if so the next president will appoint the new chairman.

"Risk comes from the Republican party, who have been openly critical of quantitative easing, and Romney, who has been openly critical of Bernanke," says Barnard.

"A Republican-nominated chairman might implement a sharp change in policy away from the bond-positive QE policies pursued to date."

Barclays predicts that if Obama wins, US 10-year yields are likely to decline to 1.5% or lower "as fiscal cliff-related worries pick up". If Romney wins, 10-year yields could rise to 2% "on the perception of a relatively hawkish Fed".

Markus Huber, head of German HNW trading at ETX Capital, points out that it's not just who will reside in the White House, or who will be Bernanke's successor, that's important. It will also be interesting to see if the Democrats hold on to the Senate and Republicans to the Congress.

"Even if Barack Obama manages to hold on to his presidency without a majority in the Senate and Congress it will be hard to pass any new laws without having to compromise with the Republican party, making major reform rather unlikely, which in turn might continue to hamper the economy and job growth," he says.

Huber adds: "The [most important] question may be: will the new president have the support and power to turn the economy around and bring down high unemployment or will we have a similar situation as we had when the Republicans retook Congress in 2010 making it very difficult for President Obama to pass new laws?"

Finally, the new president will have a monumental "US fiscal cliff'-shaped challenge to sort out once he's elected. "Whoever wins will have to face up to the reality [of the expiration of $800 billion of tax cuts and the start of spending cuts on 1 January].

"For investors, the electoral uncertainty could well be replaced by fiscal uncertainty as politicians grapple with this quandary. One only has to hope the interactions will be more mature than those which characterised the debate last August when the US lost its AAA rating,' comments Barber.

This article was written for our sister website Money Observer

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