OPINION: Obama vs Romney: will it hurt your clients?

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The market after the election – sector specific

How the US stock market performs after the election is also of interest to investors. History tells us that the stock market is likely to rally if the incumbent wins re-election. But, empirical evidence also suggests that the US stock market has historically delivered its strongest returns on the third year of an election term. This effect might be tied to the incidence of government spending within the presidential cycle, as most government expenditure occurs during the first and second years of an election term.

The biggest stock market effects this time, however, will probably be felt at a sector level - healthcare, financials and defence are sectors likely to be most affected by the election result.

Healthcare

The Affordable Care Act that was passed in 2010 (dubbed ‘Obamacare’) was designed to give 30 million of the poorest Americans access to healthcare. Opposed by the Republicans, it was criticised for being uncompetitive, inefficient, expensive and bad for the healthcare industry. They have challenged its legality as it makes buying healthcare insurance compulsory. The Act also expands the safety net of Medicaid, which provides healthcare for the poorest Americans. The election outcome is a key battleground that will have deep ramifications for the healthcare sector.

If Obama wins, companies that support Medicare and Medicaid should benefit, including pharmaceutical companies. It could also be supportive for jobs as additional hospital staff would be needed to cope with increasing patient numbers. Private health insurance companies would probably lose out.

If Romney wins, he may try to repeal the Act and replace it with an alternative. Companies from a variety of sectors that have lucrative contracts supplying Medicare (for the elderly) and Medicaid (for the poor), could be adversely affected. Pharmaceuticals would be negatively affected because there would be fewer medically insured people. Private health insurance companies on the other hand, would probably benefit – taxes, fees and regulation under the Affordable Care Act would probably be dismantled.

Financial reform

The Dodd-Frank Act passed in 2010 is the main financial service reform proposed by the Obama administration. However, it is complex and it has been difficult to implement. Romney has already vowed to repeal the Act if he is elected, criticising it for being overly burdensome. A repeal of the Act is unlikely, however. Wall Street firms have spent a huge amount of time and resources adhering to the new rules, so reform is still more likely than repeal under Romney.

Despite his threats, even the controversial ‘Volcker Rule’ that bans banks from proprietary trading probably is unlikely to change under Romney. Such a move would be politically unpopular following recent bank scandals. However, Romney would have influence over the Financial Stability Oversight Council, benefitting non-bank financial companies, such as asset managers and insurers. If Obama is elected, plans to shift OTC derivative contracts onto exchanges would benefit the clearinghouses.

Defence

Attempts to cut programs, such as missile defence under Obama, would require strong Democratic control of Congress and polls suggest this is unlikely. If the Republicans take control of Congress, defence cuts would be tempered, even under Obama. Many companies could benefit under both Obama and Romney, which is a reflection of the geopolitical tensions that still pressure US policy at present, not least in the shape of the Iran-Israeli nuclear crisis.

Firms that specialise in drone aircraft for military surveillance are likely to benefit regardless of the outcome. Funding the development of cyber security also enjoys bi-partisan support. Additionally, US defence companies will also benefit from equipping the depleted weapon inventories of close NATO allies.

If Romney wins, it is likely that he would support weapons exports to compensate those contractors adversely affected as wars in Iraq and Afghanistan wind down.

A contentious point, many analysts feel that a Romney victory would be more likely to bring about military conflict than an Obama one, presenting a potential boon for the defence industry.

In conclusion, the evidence suggests that the state of the US economy going into an election can influence the votes of swing voters and help to determine an election outcome.


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