The dust has settled on President Obama’s election win. What should you tell your clients about what it means for their portfolios?
There are a number of issues that should be on your radar, suggested Origin Asset Management partner John Birkhold.
“One place to start is the likely effect of a Democrat victory on banking policy and the flow on effects of that,” he said.
Federal Reserve Bank head, Ben Bernanke, should now have the choice of staying on, Birkhold noted. And if he does, the Fed may well continue the Bernanke policy of retaining unprecedented control of both ends of the yield curve.
“By that I mean explicit control in the short term through setting interest rates, but also in the longer term through purchases of the majority of US Treasury bond issues,” said Birkhold.
“The net result of such a policy may well be a continuing of the four-year trend in favour of ‘hard assets’ such as gold and silver, a possibility that investors may wish to consider as they plan for the future.”
He added that the future of key regulations that were part of Obama’s agenda, such as the Dodd-Frank banking reforms and so-called ‘Obamacare’ healthcare reforms, now looks more certain, and this creates practical implications for investors.
“With both now emphatically here to stay, there’s no more holding back or uncertainty,” he said, noting that that dual outcomes may eventuate on the Dodd-Frank front:
a fall in share prices as the banks are forced to divide their operations between their lending and deposit taking and investment arms;
and, conversely, an increase in profitability due to the flow-on effects of Bernanke retaining his position and associated policies.
“Some investors and commentators may argue that the falls in bank share prices are a knee jerk reaction that’s counter to the longer term profitability outlook and as a consequence may be looking closely at buying opportunities,” he said, adding that Obamacare throws up a mixed bag of possible outcomes.
“In the first instance it does seem that there will be winners and losers as Obamacare unfolds. In the near term there are concerns that insurers will be feeling strain as they are forced to bring on a large number of the uninsured with potentially questionable risk profiles.
“Because of the tax funding model of Obamacare, medical device companies are also likely to feel the pinch as higher taxes to fund the initiative come on stream.
“On the other hand, you have those hospital companies that no longer have to bear the losses of taking on non-paying patients and may therefore experience an uptick.”
Pharmaceutical companies, while likely to experience increased demand as a result of wider funding of healthcare needs, may also feel the effect of the consequent inflows of cheaper, generic products, he added.
Fiscal cliff looms
Meanwhile, the broader backdrop of Congress’s attempts to come to some kind of compromise in relation to taxation reform and the so-called ‘fiscal cliff’, will also be on investors’ minds.
“The fact is that there has been no meaningful tax reform in the United States since 1986. There is now a real opportunity for much needed reform and simplification of an extraordinarily complex and burdensome body of law. If there can be no agreement, we will be looking at four more years of uncertainty,” said Birkhold “Hopefully, wiser heads will prevail.”