President Obama: Investment outlook
President Obama will face tough economic challenges
The deadline for the 2009/2010 tax year may have passed, but this means you have a whole new ISA allowance for 2010/2011 to use. Check out our
ISAs channel.
Wednesday, 05, Nov 2008 08:52
President Barack Obama is set to be greeted positively by investors, but the recession will give him little room to manoeuvre.
Daniel Barnes explores how the investment world will react to the 44th president of the United States.
Any economic plans President Obama puts forward will be limited by two strong factors; the $700 billion bank rescue package, which he - alongside his rival Jon McCain - supported; and the upcoming recession.
Stephen Barber, head of research at Selftrade, explains: "The stock markets have already discounted for the recent impact of the credit crunch, the banking crisis and the upcoming recession.
"A new president with a new mandate will be welcomed."
Peter Dicks, chairman of Private Equity Investor, says the new president will "remove an administration which has largely become a lame duck and more importantly it will remove uncertainty.
"No doubt the first 100 days will be significant especially."
The first 100 days will be key for Obama to set his stall in order and for change to the US economy. With his stock riding high he is likely to be strongest in his first year.
However, Dr Barber explains any plans - or rhetoric used on the campaign trial - will be limited by the coming recession.
Threat of recession
Matthew Strachan, Alliance Trust head of North American equities, explains a lethal cocktail of rising unemployment, a growing fiscal deficit and the problem of how to pay for all $700 billion rescue packages, all give the new president little room to manoeuvre.
"The successful 1992 presidential campaign of Bill Clinton is said to have centred around the maxim, 'It's the economy, stupid!'. This US election is no different," he says.
"It is already too late to prevent real economic damage. Asset values, whether shares or houses, are significantly lower than last year, not something that can be said for most people's borrowings."
He adds: "There is another spoke in the wheels: the economic order of events in this recession are unusual.
"Normally an economy would slow and unemployment rise before the credit cycle turns negative. This time we got a credit crunch first. This means the US has still to work its way through a deterioration in credit quality engendered by an economic cooling."
Dr Barber at Selftrade expects the US economy to fall into recession over 2009 and climb slowly out over 2010 - with the effects of this downturn being greater than the previous and there being no obvious source of where growth will be sparked from.
Obama's new team
Early action to sooth the markets is also needed in naming the new Treasury team.
"The markets now want a quick announcement of the Treasury team to show the direction," says Dr Barber,
Warren Buffet was suggested early on a replacement to Hank Paulson as Treasury Secretary, but this is unlikely, but it sets the tone for the kind of candidate Obama will put in place.
"He needs someone with Paulson's credibility but he was a poor politician," Dr Barber said.
He explained Paulson made the mistake of telling Congress they had to vote for the bailout plan, and his successor needed to both skills of a politician and a financial CV to back him up.
Stock market reaction to President Obama
So attention now turns to how the markets will respond.
Traditionally the markets take to a new president - of whatever ilk - positively.
Russell Cleveland, manager of Renaissance US Capital, said before the result came in: "This is a good time to invest in the US market because I believe investors will view a change as good.
"The US will be withdrawing from Iraq and this will be very favourable to the stock market. So while a recession may be going on the stock market may be going up."
However, David McCraw, manager of the Edinburgh US Tracker Trust, explains positive returns from equities appear unlikely in 2008.
"Analysis of Presidential cycles since 1926 show that there may be grounds for being more optimistic - the average returns from the S&P500 have been positive in the first year of the Presidential term although the best returns have been generated in the third year of the four year cycle," he explains.
"However, given the headwinds now facing the US and global economy the first term of the new President may follow a similar pattern of rewarding investors who invest for the long term."
Daniel Barnes