Outlook for investing in the US

Cormac Weldon, Head of US Equities at Threadneedle comments on opportunities in the US depending on the outcome of the election.

This is an important election, as it takes place at a time when the credit crisis and takeover of major banking institutions by the US Treasury sees the largest expansion of government power over the financial system since the Great Depression. That is a given regardless of who wins.

"In Congress we already have some idea of developments likely to follow from increased majorities in both houses for Democrats. For example, Barney Frank, the chairman of the House Financial Services Committee will likely find his hand strengthened in his proposal to set up a new Federal agency that would oversee the government's bail out plan to buy bad debt on the books of private banks.

"Should, as seems likely, the Democrats extend their power in the legislature and the White House, we can expect to see legislation to increase oversight and regulation of the financial industry, especially in the area of derivatives and structured financial products, such as the securities with mortgage debt wrapped into them, which were at the heart of the original meltdown in the summer of 2007. Similar rules that now apply to commercial banks will probably target hedge funds and equity firms. Given the debacle of the meltdown in the sub-prime mortgage sector this would also be the case were the Republicans to win control, but the oversight and regulation would likely be more flexible and have a lighter touch.

"However, across sectors it is much too simplistic to deduce that a Republican victory would always be preferable to a win for Democrats. Potential impacts are far too myriad and subtle for that. For example, within financials the life insurance industry would probably benefit from a Democratic win, as it would stop the Republican goal of jettisoning the estate tax, which would eliminate the need for certain life insurance policies."

Below we offer a list of potential impacts on several key sectors depending on the result of next month's US election.

Utilities: A Republican victory would probably prove more beneficial for this sector as Republicans are less in favour of climate change regulation and are more pro-energy in general. They are likely to seek legislation more favorable to the coal and petroleum industries on the issues of carbon trading, or carbon taxes. The Republicans also tend to be more positive on developing nuclear energy than Democrats, although there is much less consistency on this issue with the party.

Healthcare/medicine: There are diverse subsets of this industry, which stand to be affected in a variety of ways by who wins in November. A Republican victory would prove more beneficial in the areas of pharmaceuticals, medical devices and managed care (HMOs), where in the case of Pharma Republicans are more amenable to protecting patents, while opposing the re-importation of drugs.

Weldon continues: "A Democratic win would likely benefit smaller biotech companies, where Democrats favoring speeding up the FDA approval process, and generic drugs, whose wider use is preferred by Democrats due to the much lower prices. Hospitals and nursing homes would also likely benefit from a Democratic victory, as their plans for universal coverage vastly expands the potential number of patients."

Consumer: Another area with many sub-sectors. The beverages, food and restaurant industries would likely be harmed by new curbs on immigration and strong immigration control measures favored by Republicans, while the tobacco industry would do less well under the Democrats, who favors greater taxation and regulation of the industry.

Industrials/Materials: Within sub-sectors, aggregates would benefit from Democratic control, as the party seeks to stimulate the economy with infrastructure projects. Airlines would benefit from a Republican victory, as the GOP favours less regulation and is more amenable to consolidation. Aerospace/defence is also more likely to prosper under Republicans.

IT: The picture here is not straightforward, on balance Republicans, as free-traders, have been more receptive to outsourcing. On the other hand appropriations for large scale government IT projects would probably pass the congressional approval process more smoothly under Democrats.

Weldon concludes: "These are a few of the major industries whose fortunes stand to be impacted by the differing policies and philosophies of the two major American political parties. The outcome of the election will serve to illustrate that the effect of a change of power in government can have widespread influences in the market."