While it seems that every election has the feeling of being the most important to a generation, the 2012 election may actually be able to claim this title. With polarised political parties and a great amount of uncertainty surrounding the direction of economic policy, investors should consider the investment opportunities that exist with a victory by Republican candidate Mitt Romney relative to a re-election of President Obama. In addition, it may be worth understanding the long-term challenges that face the US and what investments may be best suited for strength should a decisive political environment remain in place.
With the date of the election just around the corner, SSgA put together some analysis based on the three outcomes for investors in this part of the world.
With the benefits of efficiency, transparency and flexibility that ETFs offer, investors, financial advisers and institutions can make shifts to position portfolios for these outcomes now.
Investment implications for a Romney victory
Due to the potential for favourable tax treatment, those companies that pay dividends or have the potential to initiate programs may perform strongly should Romney win. In addition, high yielding equities offer investors attractive income opportunities in the continued low-rate environment.
Under a Republican victory, there are also several sectors and industries that may benefit. Given Romney’s interest in increasing domestic energy production, the energy sector may see positive performance on a relative basis. The metals and mining sector could also see a boost with less regulation that allows for companies to pursue more projects. In addition, due to the potential for a less restrictive tax environment, the transportation industry could have a leg up. Further, given the potential for limited defence cuts, the aerospace and defence industry may also benefit.
Asset classes or markets that will likely benefit under this outcome are dividend products, sectors such as telecom, energy, oil & gas exploration & production, metals and mining, transportation and aerospace and defence.
Investment Implications for AN OBAMA RE-ELECTION
With the potential for higher taxes, municipals bonds can offer after-tax benefits to investors in higher tax brackets. With a persistent low-yield environment and the potential for rising interest rates a seemingly longer term concern, investors may find the options of various segments of the municipal market advantageous. For those seeking income, REITs could be an interesting option because of the potential changes to dividend-paying equities that would make them less attractive than they are at present. In addition, Obama’s predilection to increase spending to boost the nation’s infrastructure may result in an infrastructure rally.
Lastly, with the introduction of Obamacare, most companies in the healthcare sector will react favourably to the re-election of the current President.
Asset classes or markets that will likely benefit under this outcome are US Municipal bond, REIT, sectors such as US/Global Infrastructure, health care and biotech.
Investment Implications for Political Paralysis
If politicians in Washington continue to lack the appetite necessary to make large scale changes to the US fiscal situation, non-dollar denominated assets as well as those that have no to low correlations to dollar-denominated assets may become more attractive. Thus, over the longer term investors may look to diversify away from US-denominated assets to those denominated in local currencies, especially in the high growth emerging markets. Outside of the relative value attractiveness, adding non-US fixed income exposure to a portfolio may offer diversification benefits.
In addition, should the US face another debt crisis or should lawmakers make a renewed commitment to aggressively reduce spending, gold could benefit from investor anxiety. In the face of countries willing to debase their currencies in order to boost exports, investors who believe that the asset class could emerge as the gold standard of currency may find new growth ahead. Lastly, with the potential for a long-term inflationary environment due to large-scale government spending, investors may find a safe haven in assets tilted toward a real return.
Asset classes or markets that will likely benefit under this outcome are emerging markets / Asian local currencies, gold or investments with an objective to drive real return.
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Important information The views expressed in this material are the views of David B. Mazza, Head of ETF Investment Strategy, Americas, SPDR® ETF Strategy & Consulting, State Street Global Advisers through the period ended August 30, 2012 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.