US Elections and Financial Implications
Much is at stake in the United States presidential elections this year. The Barack Obama presidency has been fraught with battles in a deeply divided Congress, leading to paralyses on such topics as government debt, and compromises on others such as healthcare reform.
Should Obama lose his re-election bid, it will likely lead to a change in policy direction - and economic fate. Obama and his opponent, former Massachusetts governor Mitt Romney, have different visions on the role of government in business and society.
Polls indicate a tight race on November 6.
So what's in store for the US under either candidate? Neither is likely to risk trade relations with China. US exports to China rose 13 per cent in 2011, outpacing the 9.4 per cent growth in US imports of Chinese goods. As its third largest trade customer, China is an important source of job creation for the US. The elections should not have much impact on Chinese equities, as long as no serious trade measures are taken.
Asian bonds will be a different story. Given Romney's bias for spending cuts to fix the budget, his victory could initially bring down US Treasury yields, making US dollar-denominated Asian bonds more attractive.
We assume no change in the status quo in Congress: the Senate will remain under the control of Obama's Democratic Party, and the House of Representatives under Romney's Republican Party. With neither in dominance, truly radical policy changes are not likely. But it has investment implications.
A Romney win would marginally favour the stock market, whereas an Obama win would likely lead to higher dividend and capital-gains taxes, making equities slightly less attractive, particularly high-yielding stocks such as telecoms and utilities.
Under Obama, the Dodd-Frank financial-sector reforms he started should be fully implemented, including the Volcker rule, which restricts proprietary trading at large banks. If Romney wins, this may not be finalised. He may ease bank capital regulation too.
Financial stocks would likely be unaffected if Obama is re-elected, as markets have priced in tighter regulations. However, a Romney victory should boost the valuations of large banks, brokers and insurance companies.
Treasury yields could face downward pressure initially under Romney due to budget cuts and subdued economic growth, but this would reverse after one to two years.
Romney challenged Obama to label China a currency manipulator and has vowed to do so on his first day if he gets elected. While Obama stopped short of taking this view, he lodged a complaint with the World Trade Organisation accusing China of illegally subsidising auto exports.
While there is no universally accepted method of determining the fair value of the yuan against the dollar, the fact that China's currency reserves have barely changed this year suggests that its currency is not extremely undervalued. In fact, China has probably intervened in the market lately to prevent the yuan from weakening too much.
There is scant evidence to Romney's claims. One could even argue that the tables are turning given the Federal Reserve's latest money-printing programme. Its indefinite time frame suggests the Fed's readiness to print the dollar in unlimited quantities, which could undermine its long-term value.
Despite their differences, Obama and Romney will be faced with a slow-growth economy and the pain of implementing fiscal austerity. Whoever wins the elections on November 6, the country's difficult economic reality does not change.
Hartmut Issel is head of CIO Wealth Management Research APAC, UBS Wealth Management
