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After the US election the serious business begins

Brian Tora MM blog side

It would be hard to call Wall Street’s immediate reaction to the re-election of President Obama for a second term a ringing endorsemen., A 300 point plus dive for the Dow Jones Industrial Average immediately after the result was declared suggested the capitalist community was less than impressed.

Yet should we be surprised? History tells us that markets tend to rise ahead of the election, then settle back after the event. And so it was.

On the face of it there is little to read into the result for investors. Some commentators suggested Romney would be better for business and thus markets. Others warned of the geopolitical challenges lying ahead, notably Iran and Syria, which would test the mettle of the White House incumbent, suggesting experience may count. Whoever filled the role, it is clear that the next four years are not going to be an easy ride.

As for markets, shares settled down after their initial jitters and, anyway, you could argue that the change of leadership taking place on the other side of the world had an even greater significance.

China embarks on a new era too, with far less of the razzamatazz that accompanied the US Presidential elections. Indeed, the main contrast must be in the lack of engagement the Chinese population enjoyed in these crucial decisions.

At least the tone appears to be set for a continuation of the growth prerequisite, with the President forecasting a further doubling in personal incomes for this most populous nation over the next ten years.

Of course, the more labour rates rise, the less competitive China becomes, but since the debt-fuelled consumer boom was based in no small measure on cheap imported goods from China, perhaps more of a focus on the internal market is no bad thing.

America, of course, has its own special set of problems. Much is made of the so-called fiscal cliff, due to derail the US economy at the start of 2013 – an economic version of Hurricane Sandy.

With the two houses of the United States Congress in opposing hands, it is hard to see how the dual forces of higher taxes and reduced spending, with all the concomitant consequences, might be averted. But it probably will.

The news that we may no longer see renewed quantitative easing packages greasing the rails towards economic recovery here at home might also be weighing on investors’ minds. But here, as in the US, there must surely be a limit to the extent that governments are prepared to risk the future to ensure re-election. And under the guise of “austerity”, measures have been introduced which should ease the longer term burden of debt-fuelled spending.

So we approach the end of the year with new regimes (or at least renewed regimes) in place in the world’s two largest economies but little sign of a resolution to Europe’s abiding sovereign debt problem.

Last year saw the value of equities shrink in this country, even after dividend income is taken into account. Presently we are on a knife edge as to whether 2012 will prove a positive or a negative year, but I live in hope.

Speaking at a seminar just last week, I was buttonholed by a private investor who described his mood as “fragile”. I know how he feels. Much lurks on the periphery of the investment world to make clear certainty in short supply. But good companies are proving more agile than governments, while the alternatives of bank deposits and government debt remain unappealing. 2013 could turn out to be an interesting year for investors.

Brian Tora is an associate with investment managers JM Finn & Co


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