Investors in the US seem to prefer Mitt Romney for the presidency, according to a survey carried out by Barclays last week, though congressional deadlock is a worry under both candidates.
Based on the responses of more than 350 investors in Canada, the US and Europe, responsible for managing $10 trillion of client money, the prevailing view was that equities would rally if Romney triumphs over Barack Obama next week.
“Investors seem to believe in a more promising growth outlook under a Romney win, in spite of their concerns about a likely tighter monetary policy stance,” the report said.
Clearly, the market is either betting that the Republicans’ plans for fiscal austerity will help to deliver sustained economic growth, despite the growing evidence against this view, or that Romney and his running mate Paul Ryan will be more accommodative than their rhetoric suggests.
Austerity, particularly when it involves tax hikes rather than spending cuts, has so far failed to live up to its billing, as even the IMF conceded recently. In most cases, the costs have outweighed the savings — and the effect may have been even worse without the unconventional actions of central banks.
But the preference for Romney is about more than just austerity. It is also a reaction to Obama’s plans for higher taxes and tighter regulation of the financial industry, though this was, unsurprisingly, much more of a worry for US investors than Europeans.
“A congressional deadlock and tax/regulatory impediments were the most voted concerns under an Obama victory (50% and 43%, respectively),” said the report. “When responses were weighted by client size (according to assets under management), the tax/regulatory concerns become the predominant risk factor under an Obama administration (61% of weighted votes), leaving congressional deadlock second (24% of weighted votes).”
According to Barclays, investors favour long equities and short bond portfolios as the best way to express a Romney win. “As many as 16% even expect the equity rally to be deep and sustained in that case,” it said.
Under an Obama win, “investors favour bonds and are divided about the direction of equities, but would choose bonds and equities over FX and commodities to express this scenario”.
However, any equities sell-off under Obama is expected to be short-lived. His administration is a known quantity and another four years is unlikely to deliver any lasting shock to markets.
And that is probably what investors will get. They may prefer Romney, but Obama has the edge at the moment. Nate Silver’s FiveThirtyEight blog on the New York Times website, which uses statistical techniques to analyse polling data, gives Obama a solid 77% chance of winning and predicts a 60-vote lead in the electoral college. InTrade, the online prediction market, gives him a 65% chance of winning and other betting sites quote similar odds.
It looks like a slam-dunk for Obama, which suggests that the majority of voters aren’t too keen on tightening their belts — or maybe they just love Big Bird.
Whoever wins, the first job will be to find a way to avert the dreaded fiscal cliff. After that, stronger growth and more jobs will be the focus, and if the next president can deliver that, investors won’t care which party he belongs to.