Top earners, the oil industry and pharmaceutical firms look set to be the winners or losers as the US presidential battle picks up pace.
The close contest has left fund managers pitching scenarios and weighing up equities . Some managers have been prepared to back one side but, with much of the focus so far on Iraq, many are still unclear over the economic policies of Republican George Bush and Democrat John Kerry.
History has shown that the Dow Jones rises on average by almost 10 per cent more over the presidency of a Democrat than a Republican.
In the 14 presidential elections since the Second World War, the Dow Jones has risen by 46 per cent in the four years following a Democratic victory compared with 37 per cent for a Republican win.
Fund managers leaning towards the Kerry camp are keen to point out that the often held view that “the economy does badly under a Democrat president” is not true.
Research from Halifax Financial Services shows that in the critical period from June to November from parties electing candidates and the election, the Dow Jones Industrial Average has risen by 5 per cent when a Republican candidate wins.In the same period, when a Democrat wins, the average is unchanged.
Kerry has indicated that he would examine America's trade agreements and work to reduce the current account deficit.
Standard Life investments head of global strategy Andrew Milligan says: “Investors will need to assess whether such policies could affect trade with Europe and Asia. More possible in practice could be a renewed policy of benign neglect to enable depreciation of the dollar.”
But many managers point out that the role of the president in influencing the business environment in the US is diminishing. For many, the key person in American business is Alan Greenspan, whose autonomy is crucial.
Hargreaves Lansdown investment manager Ben Yearsley says: “Whichever president gets in, they are going to need the support of big business. There would be no point in developing policies that would work against them. The president would be hamstrung without them.”
Kerry supporters point to the fact that Bill Clinton's presidency saw a net increase of 23 million jobs while Bush has presided over a net loss of 2.7 million jobs.
The US government deficit has moved from a surplus of 0.9 per cent of GDP in Clinton's last year to a projected deficit this year of 4 per cent, cyclically adjusted. Average share prices are down by 30 per cent from their peak.
Isis Asset Management economist Steven Andrew reckons that whoever wins, the first year of the new term is going to prove a tough time for the US economy. He says: “From its current point, the best possible outcome for the US economy is that a steady decline in the dollar, combined with stronger demand from overseas economies continues to assist US exporters and encourages a benign correction in the current account deficit. Our view for a while now has been that, with the economy's momentum seriously in question, John Kerry would benefit at Bush's expense and be elected to the White House.”
But many fund managers will be backing the Republicans so they hang on to tax breaks such as 15 per cent capital gains tax and the relaxation of double-dividend payments.
Bush has advocated making this recent series of tax cuts permanent and plans to raise spending on defence while reining in other areas.
Changes to the CGT breaks for high-income taxpayers would cause a reaction in the bond markets. A Bush victory would be likely to prompt continued consumer and public spending while a Kerry win could see this fall. Bush's reduction of income tax by around 10 per cent boosted retail spending but soaring oil prices are a contentious issue.
It would seem likely that a Bush victory would lead to changes in the regulatory regime for oil drilling. US oil stocks are dropping, with lack of supply a factor in pushing up prices. Fund managers are starting to turn to drilling firms which could be buoyed by the potential of relaxed laws in drilling in environmentally sensitive regions.
Lead portfolio manager for the £139m Baring American growth fund Sam Rahman thinks a Bush re-election would have a more positive effect on the economy than a Kerry victory. He says: “People perceive Kerry to be not as strong on security. It is also not clear what he will do about rising oil prices. It is the same with many other parts of his agenda. There is uncertainty.”
Gartmore senior US fund manager Gil Knight says Kerry's healthcare policy is making investors nervous and boosting the Bush camp. He thinks that Kerry's keeness to cut healthcare costs spells bad news for shares in drug firms. Kerry has made it clear that he would look to countries such as Canada to bring in cheaper medications and would use legislation to cut back on the profit margins of pharmaceuticals.
Knight says: “If Bush were re-elected, I would probably look at some drilling companies. There is no new oil being drilled in the States and sooner or later, someone is going to do something to change that. I would seriously consider my position in pharmaceuticals if Kerry should get in. We like medical research companies and a Bush victory would strengthen that position.”
Threadneedle head of US equities Cormac Weldon says: “Most people think the impact that a change of president can have is relatively benign.
Whatever the outcome, the Federal Reserve will still be run by Alan Greenspan and that is where the management of the economy lies but the generally held view that the Republicans are good for the markets does not necessarily hold true.
