Obama vs. Romney: Down to the wire…

Manish Singh, head of Investment Services at Crossbridge Capital, gives his view on how markets could react depending on the US presidential election outcome.

At the turn of the year, the global economy faced three main risks – a Chinese “hard landing”, a double-dip recession in the US, and a eurozone collapse.

What we‘ve seen to date, looks like a “soft landing” in China and no risk of a US recession, Christmas cancelled. The 3Q US GDP number of +2% growth QoQ, is an improvement from the +1.3% of last quarter but all of the +0.7% increase can be accounted for by increased government spending. Uncertainty about government policies is the key reason for weaker private capital spending and weaker consumer confidence, two key factors that drive GDP growth.

As for the third risk – the survival of euro, I am more inclined to believe “Daylight Savings” is a bank than to believe that the euro’s future has been secured for the long term.

The US presidential campaign is coming to an end (yawn) and next week we shall learn whose narrative prevails. This election is the start of something new – a generational struggle between retiring baby boomers (hands off my pensions and healthcare, more income and less inflation) and the twenty- something graduates (where is my job and my house; I am in student debt, get me out of here).

Both Democrats and Republicans see history on their side. Gallup (the polling company) noted that with the exception of president Truman, all incumbent Presidents who successfully sought re-election in the post-World War II era had approval ratings that averaged 50% or higher in the year in which they ran. president Obama’s approval rating has averaged below 50% all of this year. On the other hand, no Republican has ever won the White House without winning Ohio. Romney still trails in Ohio. There is always a first time for everything.

A Romney victory would very likely be greeted with a cheer and a rally (long US Financials is the trade) as Obamacare is repealed and maybe parts of the Dodd/Frank framework disbanded. Small businesses are likely to be the focus of a Romney administration i.e. a start of spending and hiring again thus driving business activity and lowering unemployment. As with all Commanders-in-Chief, president Romney will have his “honeymoon” period of favourable ratings and positive sentiments.

President Obama has had his “honeymoon” and is unlikely to secure a second. An Obama victory would likely be treated with more caution than cheer by the equity market due to the threat of continued gridlock. Having said that, I am very hopeful, that Congress and president Obama, having failed to dislodge each other, will have no other option but to become more conciliatory.

Whatever the outcome of the US election, I am not overly concerned about the prospect of the market equity for the rest of this year and early next year. Volatile, yes, but the market will continue to do well and GDP growth will increase steadily once a long term plan for deficit reduction has been put in place in the US, and next year we will see that plan.

It’s not just the US that may have a new leader, the world’s second largest economy, China, will most certainly have a new leader too as the political cycle in the two economies coincides next week. While the market has been focused on Europe all of this year, what happens in US and China post-elections, will dominate the agenda over the coming months. Policy gridlock in the US and a policy vacuum in China will likely give way to new announcements and new actions in both countries.

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