Money Managers Handicap Sectors Based on Winner
With Barack Obama and John McCain poised to become the Democratic and Republican presidential nominees, money managers who ordinarily might already have an idea of where to invest after the November election are -- like many U.S. voters -- still undecided.
A stereotypical view is that a Republican president helps sectors such as defense and health care while a Democratic president is good for, well, not much. The reality, of course, is more complicated. For instance, markets historically have performed better during Democratic administrations than when a Republican was in the White House.
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"It's amazing that with the election as close as it is, we have so few policies that we can bank on," said Mark Bavoso, head of U.S. asset allocation at Morgan Stanley Investment Management.
Part of this is because both candidates are veering away from policies that typically define their parties and are moving more to the center. It's also because, said Mr. Bavoso, in a turbulent year neither man wants to corner himself with his promises.
"There's still no concrete [economic] plan from either candidate," said Mike Church, senior portfolio manager of the Church Cap Value fund. "And that's concerning."
"Uncertainty from the election has been one factor that's weighed on the markets," said Brian Levitt, corporate economist at OppenheimerFunds Inc. He added that markets historically prefer one party in the White House and one in Congress. "Free markets like logjam in government," he said, because it usually means less regulation.
Mr. Bavoso said he believes that the results of congressional elections will be just as important as the outcome in the presidential race. Bob Doll, global chief investment officer of equities at BlackRock Inc., said that the biggest question is whether the Democrats reach the magic number 60 in the Senate. With 60 votes, they would be able to force legislation through the upper chamber regardless of who is president.
Expect a bigger tax bite under a new administration, though the pace and extent of the increases will depend on who wins. Despite Mr. McCain's tax-cutting promise, money managers predict that a Democratic majority in Congress all but guarantees that the Bush administration's tax cuts will expire in 2010. In other words, expect higher capital-gains, dividend and income taxes by 2011 at the latest.
As Mr. Bavoso pointed out, Mr. McCain will still need a package that meets the approval of a heavily Democratic Congress.
"We handicap the outcome as investors to take the worst-case scenario," Mr. Bavoso said. The expectation of higher tax rates is already being factored into the market and will continue to be into 2009, he said.
Once taxes do rise, look for certain sectors to take a hit. "Higher taxes could create a challenge to disposable incomes," said Mr. Bavoso -- another blow to the already struggling consumer-discretionary sector.
"Fewer high-end retailers will do well," Mr. Doll added.
But while tax increases may hurt some stocks, they can be good for the bond sector, especially for tax-free municipal bonds. "When federal tax rates go up, municipal-bond yields on an after-tax basis also go up," said Steven Permut, co-manager of American Century Tax-Free Bond Fund.
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All the money managers agreed that the alternative-energy sector will benefit if Mr. Obama wins, though Mr. Church said the sector should improve regardless of November's outcome because of the likely introduction of a carbon-trading system along with the continuing high price of oil. Messrs. Church and Doll predicted that companies in the nuclear-energy area will do well if Mr. McCain wins.
"McCain seems pretty convinced that nuclear power is the solution" to energy concerns, Mr. Church said, though he added that this enthusiasm may be tempered by a Democratic Congress. Mr. Doll said he expects traditional oil and gas companies also to do well under Mr. McCain.
As for the defense industry, Mr. Doll said that it would be wrong to think that a McCain victory would immediately lead to an uptick in that sector. "Given how long it takes to impact the defense budget, I think there'll be less difference in the early years," he said, adding that defense-related stocks could get a quick lift, however, from investors who expect better times ahead.
Mr. Doll added that infrastructure can be expected to do better under Obama, while managed-care companies in the health-care sector should benefit from a McCain presidency. But, said Mr. Doll, fiscal conditions will hamper the more ambitious parts of either candidate's health-care plans.
"It's going to be sluggish at the start of anyone's administration," said Oppenheimer's Mr. Levitt.