Election economics

Who will win the US election and what will it mean for the world's largest economy? Head of Economic Research at Mitsubishi UFJ Securities International Brendan Brown gives Lucy Mair the lowdown

The outcome of the US election in November will boil down to one thing: the economy. Americans want a return to prosperity, and when they go to the polls they'll vote for who they believe can put the American dream back within their grasp. To do so, the winning candidate and his party will have to tackle the huge fiscal deficit and put the US back on track for economic recovery.

Brendan Brown is Head of Economic Research at Mitsubishi UFJ Securities International (MUSI), the investment banking arm of global financial institution, Mitsubishi UFJ Financial Group. It's his job to produce political and economic insights to help the bank's sales and trading staff and clients manage portfolios of investments. Recently, he's been keeping a close eye on campaigning ahead of the US election.Its outcome will have a huge impact on the financial markets because the result will affect policy relating to the level of taxation, size of the federal government and monetary policy.

"When you're giving investment advice, you have to analyse a kaleidoscope of possible future scenarios and weigh up the probability of them occurring," Brendan explains. "In the case of important elections, you have to look at the possible scenarios ahead depending on who wins or loses."

As well as monitoring political and economic developments, Brendan's role involves analysing how the markets view these events. He's been consulting the financial and political information markets daily for clues to the probable outcome of the election. While opinion polls measure voters' intentions and are constantly in flux as they react to a rally here or a gaffe there, the information markets show how investors are taking political views with their money and can be a more accurate political and economic barometer. "By the time we get to 6 November," says Brendan, "the financial markets may have already fully adjusted to the most likely outcome of those elections, so it's unlikely that there'll be dramatic change overnight."

Two horse race?

Two weeks ahead of election day, some swing voters may still be undecided on the candidates. But the financial markets have been pricing in a victory for incumbent president Barack Obama for several weeks. "At the end of September, the information markets were giving a 75 to 80 per cent probability of Obama being re-elected for a second term," says Brendan.

For ordinary Americans, the return of the president for a second term could mean an endorsement of the federal government providing universal healthcare, introducing equitable taxation and legalising same-sex marriage. But, in the financial markets an Obama victory would suggest support for the president's monetary policy. Obama and chairman of the Federal Reserve Ben Bernanke have followed a strategy of quantitative easing and low interest rates, which has driven asset prices higher, made it possible for large corporations to borrow money at low rates, and kept mortgage rates low.

The markets are presuming that Republican challenger Mitt Romney will lose the presidential election, so Brendan believes it would be "extremely surprising" if he were to triumph at the polls. Although Romney delivered a winning performance in the first round of televised presidential debates, which pushed his approval rating above Obama's according to some opinion polls, Brendan reports that the debate had "remarkably little impact" in the markets, so doesn't consider his chances of victory improved.

White House and beyond

The presidential battle dominates the headlines, but it's important to remember that it's not the only election taking place, warns Brendan. "The congressional election is just as important as the presidential election," he says. Currently, the information markets and polling evidence indicate that there will be a split outcome, with the Republicans maintaining control of the House of Representatives but failing to gain control of the Senate. "But," says Brendan, "if the Republicans do take control of the Senate they will be able to block Obama's policies, assuming that he wins the White House."

This scenario could induce "political paralysis" with potential positive and negative effects on the financial markets, Brendan says. "A hung Senate means that Obama's tax rises would have to be pared back and some of the big government programmes would have to be curtailed as part of any eventual compromise. This would be good for the equity markets because it would raise the confidence of investors. But, the period of dislocation when the two parties bargain with each other could be quite negative for the markets due to uncertainty."

To deliver investment advice Brendan also has to take into consideration the impact of geopolitical risk on the US economy. "Very often there are multiple external events and scenarios affecting the markets," he explains. Currently, the key geopolitical uncertainty revolves around Iran and whether it's going to become a nuclear power. "If Obama is re-elected, there is uncertainty regarding what his policy toward Iran would be. If diplomatic efforts fail to stop the country from becoming a nuclear power, there could be a military strike against Iran, or even a nuclear arms race in the Middle East," says Brendan. Such scenarios would instantly raise oil prices and prompt investors to put their money into gold for safety.

Weighing it up

From his analysis of the markets, Brendan is confident that president Obama will secure another four years in office when Americans go to the polls on 6 November. Coupled with the likely prospect of the Republicans keeping control of the House, there could be economic problems ahead as bipartisan agreement on fiscal and foreign policy is unlikely. Nevertheless, Brendan is optimistic about the outlook for the US economy in 2013.

"There are three very good things happening for the US. First, there's been a big rise in corporate profits, which should lead to a wave of investment and more jobs. Second, the US is at the forefront of the technological revolution and leading in the manufacture of 3D- and nanotechnology. And third, there's a revolution in energy extraction with the rise of natural gas fracking, which is transforming the US's access to energy." Who Americans will choose to harness these economic opportunities, only time will tell.