WE WERE gripped by the most exciting US election in decades, but what are the financial implications of Barack Obama’s election?
What effect will it have on the economy, stockmarkets and international tax issues?
The President-Elect’s first task will be to return confidence to the financial system and the economy – and there is no denying that he has a huge task ahead of him.
Simon Laing, a fund manager at Newton Investment Management, explains that the state of the economy means that “broader policy reform will take a back seat to economic rejuvenation plans over the next two years… We can expect announcements of fiscal stimulus through 2009”.
Peter Anderson, chief investment officer for US equities at Allianz Global Investors, agrees, saying that although Obama will be greatly constrained by a budget deficit which could hit 1.5 trillion US dollars next year, he still expects two fiscal stimulus Bills to be passed in the next six months.
Both will provide for tax rebates and tax reductions for low and middle-income earners. Higher income groups will face rising taxes, but these may be delayed until 2010 and 2011 to allow time for the economy to pick up first.
There is also likely to be increased regulation for banks, brokers, hedge funds and insurance companies.
Prior to the election, Obama had outlined three economic plans:
A 190 billion US dollars stimulus package, consisting primarily of tax rebates to consumer spending and boost gross domestic product growth. It includes plans to reduce foreclosures, which will help the real estate market recover, thus helping banks’ balance sheets.
A mortgage crisis plan to fix many of the underlying problems that caused the crisis.
A long-term economic platform which addresses income inequality issues and development of green technologies, thus increasing jobs and providing a competitive edge for the US. His proposal to end the war in Iraq and improve defence budget oversights will help reduce the 740 billion US dollars annual military spending. However, analysts worry that his proposal to review the North American Free Trade Agreement (NAFTA) could harm free trade.
While only time will tell how quickly he can improve the economy, and to what extent his pre-election rhetoric will translate into fruitful action, there is no doubt that he will be focusing on this issue and aiming to take as many steps as possible to restore confidence and increase growth.
He immediately began working on his economic plan. Within days of the election, he had assembled a meeting of a ‘Transition Economic Advisory Board’, a group of 17 leaders on economic issues, to call for ‘swift action’ to fix the nation’s economy. In the following press conference he said:
“Immediately after I become President I will confront this economic crisis head-on by taking all necessary steps to ease the credit crisis, help hardworking families, and restore growth and prosperity”.
While there is a perception that Republican wins are better for the stockmarket, Aris Vatis, manager of the Fidelity American Fund, points out that in post-election years, “the six Democrats who won the White House coincided with stronger stock returns in their first year (16 per cent), while the nine Republicans suffered through below-average stock returns (two per cent).”
Looking back over the last 59 years, while there is generally a rally between the election and the end of the year, it is the third year of a Presidential term which has proven far better for market returns, averaging more than 20 per cent.
One reason for this is that new Presidents tend to bring in the most unpopular reforms in the first two years and vote pleasing ones from the third year as they start to build up to their election campaign in the fourth.
Against the current backdrop it may be different this time, however, since Obama will need to focus on stimulating the economy right away. There is also a significant argument that the US market has already priced in a global downturn and while economic conditions will continue to be difficult, many are confident that the arrival of Obama should bring a ray of light to the US market and economy.
Anthony Hilton, financial editor of the Evening Standard, said that “given that confidence is the key, you would expect the market to turn well before the economy does. The Obama bounce next year could be surprisingly good”.
Garrett Fish, manager of the JPMorgan American investment trust also reminded investors: “History has shown that during times of severe stress in the markets there are decent buying opportunities… If you are interested in buying high quality shares, many are now on sale. Looking out over the next few years this should prove to be another example of buy on fear, sell on greed”.
In February 2007 Obama was the co-sponsor of the US’s Stop Tax Havens Abuse Act, which outlined a series of measures to crack down on offshore jurisdictions.
On his electoral website, Obama’s Plan for Restoring Fiscal Discipline includes:
“End Tax Haven Abuse: Building on his bipartisan work in the Senate, Obama will give the Treasury Department the tools it needs to stop the abuse of tax shelters and offshore tax havens and help close the 350 billion US dollars tax gap between taxes owed and taxes paid.”
The interconnected nature of the global economy means developments in the US have far reaching ramifications for other nations. Any success that he has in curtailing use of so called ‘tax havens’ could have implications in Europe.
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