With the Presidential elections just a few weeks away, online trading exchange Intrade has 70% odds that Barack Obama will win. Given such a high probability of Obama's reelection, it may behoove investors to position their investment portfolios accordingly.
Let's look at the different sectors.
Infrastructure -- In Obama's nomination speech at the Democratic National Convention he stated he will "use the money we're no longer spending on war to pay down our debt and put more people back to work, rebuilding roads and bridges; schools and runways." Rebuilding infrastructure has been part of Obama's stimulus spending plan since 2009. If Obama wins reelection it is likely that he will make further commitments to public works projects. Stocks of companies like Caterpillar (CAT) and General Electric (GE) (a Baker Ave Blue Chip Core position) would see continued earnings growth.
Defense – If there is no resolution to the fiscal cliff this year there will be automatic cuts in U.S. defense spending starting January 2013. Cuts will amount to the tune of 9.4% across most defense programs, or about $50 billion per year for the next nine years. Obama's intention to apply the savings from defense spending towards debt reduction and infrastructure spending suggestst he has no intention to stem the cuts in defense spending should the fiscal cliff become reality. Companies that will likely be under pressure include aerospace and defense companies like Lockheed Martin (LMT), Northrop Grumman (NOC) and General Dynamics (GD).
Energy – A common theme during this election has been the call for America's energy independence. The approach to energy independence is quite different between Obama and Mitt Romney. Obama's approach to energy independence is to invest in clean energy like solar and wind power and $112 billion was spent on various projects for green stimulus, including subsidies for wind farms, solar panels and other renewable energy sources. An Obama reelection is likely to mean a continued emphasis on clean energy investments which would benefit companies like First Solar (FSLR) and GE, which is one of the largest turbine manufacturers for wind energy stations.
The coal industry is likely to be the biggest loser under an Obama reelection since Obama's administration wants to work with the Environment Protection Agency to control carbon emissions by closing down aging coal production facilities. Stocks of companies like Arch Coal (ACI) and Alpha Natural Resources (ANR) are likely to see challenging business conditions under a second Obama term.
Healthcare – Stocks of hospital companies and Medicaid HMOs are likely to benefit from an Obama reelection. Hospitals write off a whopping $40 billion of unpaid medical bills a year from patients who do not have medical insurance or otherwise do not have the means to pay. The Patient Protection and Affordable Care Act otherwise known as Obamacare, would likely mean a reduction in the amount of unpaid medical bills to hospitals. Stocks of hospital companies like HCA Holdings (HCA) and Community Health Systems (CYH) would likely benefit.
The enactment of Obamacare would also mean that 16-20 million new Americans could become eligible to enroll in government sponsored Medicaid. Medicaid HMO companies like WellPoint (WLP), Molina Healthcare (MOH) and Centene (CNC) are likely to see millions of new premium payers come into their healthcare plans.
But to help pay for the cost of Obamacare, an additional 2.3% tax will be levied on the gross revenues of medical device companies. A tax on gross receipts means that a medical device company could be paying taxes even if it does not generate net income. This could be a burden on companies that incur losses due to research and development costs. Stocks of medical device companies like Stryker (SYK) and Zimmer Holdings (ZMH) are likely to be negatively affected. Stryker has already announced that it would eliminate 5% of its global workforce to offset the additional tax it would pay starting in 2013.
While the elections are just around the corner, the political climate still remains very fluid. As tactical managers, we continually scan the market for investment opportunities given the ever-changing geopolitical landscape. Should Romney stage an upset come November, the stocks highlighted above could have the opposite fortunes.