Weighing the Obama-Romney calculus
(The views expressed in this column are the author’s own and do not represent those of Reuters)
Much is at stake in the United States presidential elections this year, perhaps more in terms of policy than in the past few election cycles. The presidency of Barack Obama has been fraught with battles in a deeply divided Congress, leading to paralyses on some major agenda such as government debt, and significant compromises on others such as healthcare reform.
A change in presidency, should Obama lose his re-election bid, will also likely lead to a change in the country’s policy direction — and perhaps economic fate. Obama and his opponent, Mitt Romney, have markedly different visions on the role of government in business and society.
As I write this, polls suggest an Obama victory, not so much because he has boosted his appeal, but more so because Romney has turned off many voters with his gaffes in recent weeks. One could even argue that Obama skilfully managed to make the campaign more about the person of his opponent rather than economics or political programs. The former Michigan governor’s off-the-cuff statement that 47 percent of Americans do not pay taxes and were dependent on welfare has alienated him from those even in his own party.
However, the three-round presidential debates will soon be in full swing, and Romney, a skilled debater who had been neck-and-neck with Obama until his infamous statement, may still have a shot at redemption and perhaps victory on November 6. It would be unwise to write him off.
A TALE OF TWO PARTIES
So what’s in store for the United States under either candidate? The answer also depends on the outcome in Congress, but our assumption, as that of many others, is no change in status quo: The Senate will remain under the control of Obama’s Democratic Party, while Romney’s Republican Party will retain its dominance of the House of Representatives. With neither party having free reign, we cannot expect truly radical reforms, including in such crucial areas as fiscal spending, social welfare and the business sector. Nonetheless, there will be different investment implications whoever takes the White House.
An immediate challenge is how the country deals with its fiscal problem — the same issue that knocked it off its triple-A credit-rating perch in 2011. Both parties will likely seek to cut deficit spending, with important differences. Under an Obama presidency, the Democrats will likely consolidate the budget with a higher share of taxation, while the Republicans will likely focus on spending cuts, which would depress short-term GDP growth but benefit long-term growth. A corporate tax reform is likely under both parties. While Democrats would aim to close loopholes, effectively raising taxes, Republicans would seek to raise revenues in a tax-neutral manner.
Another crucial item is the healthcare program, which also ties to the budget given that the country has billions of dollars worth of unfunded healthcare liabilities. Democrats would prefer to leave the current program untouched as they had significantly reformed it during Obama’s current term, expanding Medicaid which provides entitlements for low-income people. Republicans are likely to seek cost cuts and block the expansion of these benefits.
On the business sector, Democrats are more likely to advance green energy, whereas Republicans would likely focus on making some of the recent financial-sector reforms more industry friendly. If Obama returns to the White House, the Dodd-Frank financial-sector reforms he started will likely be fully implemented, including the controversial Volker rule which restricts proprietary trading at large banks. If Romney wins, this rule is not likely to be finalised, and he may also ease regulation of bank capital.
Obama could push for regulations that encourage alternatives to carbon-intensive fossil fuels, promoting renewable energy and increasing the pressure against coal usage. Romney would reduce or simplify some environmental regulations and facilitate onshore and offshore drilling.
With its lighter-touch regulation, far-reaching revisions to entitlements, and a potentially more business-friendly tax overhaul, a Republican win would favour the stock market, whereas a Democratic win would more likely lead to higher dividend and capital-gains taxes, making equities slightly less attractive, particularly high-yielding stocks such as telecoms and utilities.
Financial stocks would likely be unaffected if Obama wins re-election as markets have priced in tighter regulations. However, a Romney win would expand price-to-earnings valuations of the large banks and brokers. These companies represent nearly 40 percent of the sector. Insurance companies, which make up 25 percent of the sector, would be largely unaffected, but there could be a “halo effect” that also boosts this industry’s valuations.
An Obama re-election would not have much impact on the healthcare sector, again as the status quo is maintained. However, markets could respond negatively to a Romney victory as fewer benefits mean lower revenues for health-services providers. Companies that make products — such as pharmaceuticals, biotech and medical devices, which comprise 80 percent of the market cap of the sector — would suffer from fewer Americans with medical insurance coverage.
Treasury yields could be subject to downward pressure initially under Romney due to more intense budget cuts and subdued GDP growth, but this would reverse after 1-2 years. Rating agencies are likely to wait and see how budget issues are tackled. We expect a satisfactory deficit reduction package and an increase in the government debt ceiling regardless of the outcome of the election.
Despite their differences, Obama and Romney will have a few things in common: Both candidates would be faced with a slow-growth economy and the pain of implementing at least some fiscal austerity, and both would have to reckon with partisanship in the legislature which would inhibit them from implementing or repealing ambitious reforms. In short, the United States’ difficult economic reality does not change.