Obama, The US Economy & Your Pension

Posted on: 12 November 2008 by Gareth Hargreaves

Experts comment on what Barack Obama's victory means for the US economy and British investors and pensioners.

Senator Barack Obama was elected the 44th President of the United States with a large majority, winning at least 379 electoral votes, well in excess of the 270 needed for a majority.

As Paul Niven, Head of Asset Allocation at F&C, explains, gains have also been made in the US Senate, increasing the Democratic majority from 51-49 by an expected eight seats. When Obama is inaugurated on 20th January he will be in a position of clear control over federal government.

"He faces huge challenges on the economy, with the credit crisis threatening a deep and long recession and the escalating cost of the 'war on terror' also pressurising government finances."

"It appears as if the economy was by far the most important issue for voters in this election. With significant majorities, it is likely that Obama will move decisively to tackle the immediate economic issues with the most significant action to be taken in the near term being a material fiscal stimulus package, probably in excess of $200 billion. Drawing from his campaign pledges, he plans to invest over $25 billion on infrastructure, spending on roads and bridges as well as school repairs, and send $500 to consumers hit by rising energy costs."

The US is waiting to see how their new President performs, but British pensioners, institutional investors, shareholders and companies should be aware of what Obama's victory means for them.

"Very few people have completely grasped how ordinary people in the UK own large swathes of corporate America, through our pension funds and investments," says Colin Melvin, CEO of Hermes Equity Ownership Services.

"Shareholders' rights in the US are not as strong as they are in the UK so even though you and I are owners, by default, of big companies in America, our powers to hold these businesses to account are limited. Most of us are still oblivious to the fact that our pension schemes are invested in companies that are taking unacceptable risks on our behalf and paying executives excessive and unjustifiable bonuses - all things we can do very little about because of our limited rights as shareholders in the US."

However there may be hope in sight.

"Washington will be powerfully motivated to protect hard-hit pension funds. In Barack Obama's first 100 days of office we can expect to see the rights of shareholders strengthened."

"He understands the need for change to the economic landscape to prevent a recurrence of the greed and overtrading which have driven the current crisis. Obama needs owners to shoulder their responsibilities so that the regulators can focus where they can best add value. This will include a 'say on pay', and access to the proxy, the ability to propose directors to the board. There may also be legislation that will give new life to defined benefit retirement plans over contribution schemes."

"This will spur institutional investors such as pension fund trustees, the guardians of our retirement income, to take up their responsibilities as owners and will give important new tools to do the job. Given the already more open view of the Obama administration, I expect this to become a two-way exchange internationally, with the US providing important leadership in addition to borrowing practices from abroad."

"These initiatives will lead to more meaningful director elections and more accountable boards, to the long-term benefit of us all as corporate owners through our pensions and investments."

America will retain its position as the free market, maximum entrepreneurial country in the world even as Obama's more left of centre policies are adopted, believes Nick Ford of SWIP.

"He'll increase healthcare coverage for the poor and probably finance this with increased taxes on tobacco and the profits of some energy companies, assuming the oil price rises above a certain level. High earners may be asked for greater social security contributions and we could see marginally higher taxes on dividends and capital gains. Finally, expect greater regulation in the banking sector with a particularly tight leash around Wall Street's neck, something few would argue could be a bad thing."

"We've seen these types of policies in prior periods of Democrat Presidencies and the impact on economic growth was fairly muted. The country positively flourished under Bill Clinton's tenure!"

"Never underestimate the ability of the US to bounce back from a period of adversity and re-energise itself. The country now has a President with a great chance to restore the country's reputation overseas and measures taken to cure the financial crisis have already been taken. I expect a new "feel-good" factor to gradually take hold once the worst of the job losses are over and house prices stabilise."

Those whose pension fund is invested in US shares may be glad to hear that 4th November saw the largest Election Day rally on record in the US equity market, with the S&P500 up by 4.1 per cent, according to Niven.

"This is likely, in part, to the bullish interpretation of Obama taking aggressive fiscal action to stimulate the economy and having a clear mandate for change. Beyond the short-term Obama bounce, investors will once again focus on fundamentals. The co-ordinated and aggressive banking recapitalisation programmes, guarantees and monetary easing do seem to be leading to a gradual thawing in the frozen money markets and there has been some improvement in credit conditions, albeit modest. The world seems to be looking, once again, for the US to lead in an economic recovery."

"Obama inherits an economy in recession and will face a period of deleveraging in the real economy which will inhibit growth for some time, regardless of his actions. It is indeed to be cheered that we have a US President with the authority to address some of the largest economic challenges for generations, who has shown willingness to try to reinvigorate domestic growth and who has high approval ratings outside of the US.

"Nonetheless, and despite our view that both credit and equity markets, even after the latter's 20 per cent recovery from the lows, offer excellent long-term value, the near term corporate and economic environment ensures that market's initial euphoria will likely give way to a more sober assessment as Obama's plans become viewed as a damage limitation exercise rather than a precursor to renewed economic vigour."

"Look for a decent stock market rally into the end of the year," predicts Ford. "Equities have already priced in a fall in profits of around 40 per cent and the markets have usually given a new President a roar of approval as he gets set for work. There's no reason to expect this time to be any different especially as Obama has bags of charisma, youth and strong leadership qualities, exactly what downtrodden American consumers and homeowners are looking for right now."

"There are already signs that the credit markets are beginning to recover. There will still be a painful recession next year but this has most likely been discounted by the market and history has shown that the best time to buy equities is often during such periods, not when all seems well and valuations are expensive."

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