Schemes with US equity inv-estments should brace themselves for two years of underperformance once the race for the White House is over, fund managers warn.
Fund managers say US equities usually outperform during presidential election years only for returns to fall flat afterwards.
Standard Life Investments says US equity returns – as measured by the S&P 500 – increase by at least 10% during election years before falling back to around 3.8% in the next 12 months and under 2% the following year.
SLI feels that whoever is elected in November will have difficulties dealing with the budget deficit and the fact that President Bush’s tax cuts are not sustainable, given his spending plans.
SLI also warns that if the US Federal Reserve succeeds in steadying the US economy, it could choose to raise interest rates. If that happens, it will have an impact on equity markets as well as consumers and mortgage-holders.
SLI global investment strategist Ken Forman said: “US equities usually perform least well in the first two years of a presidential term. The first two years after an election is when politicians make the difficult decisions or when the Federal Reserve feels empowered to tighten monetary policy – 2005-06 fits this scenario.
“Both Democrats and Republicans are concerned about the ballooning size of the US fiscal deficit. If the Fed succeeds in creating a sustainable upturn, it will return monetary policy towards a neutral setting in 2005.
History suggests the first years of any administration is difficult for investors and elected officials.”
Schroder Investment Management chief economist Keith Wade agreed and pointed out that US companies had reduced their head count and expenditure over the past three years and there was no further scope for productivity gains or profit increases.
But Deutsche Asset Management global chief economist Steven Bell disagreed.
“I’m not as worried as others are as US fundamentals are extremely good. US equities will have a good but not great year. Over the medium-term, equities will have a slightly dull aspect for some time, but there’ll be no big decline.”
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