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Welcome to Election Season

January 17, 2012

Forget the Kentucky Derby with its mint juleps and heartstring-tugging back stories.  If you’re looking for a truly dramatic horserace, look no further than this year’s run-up to the U.S. presidential election as we count down to November. 

For Americans it means choosing a leader to guide the country for the next four years.  But what does it all mean to investors?  Once you get past the mudslinging and the emotional policy pleas, how can you expect all of this political theater to impact the markets?

Gary Motyl

Gary Motyl

Continuing with our series examining the issues which may shape 2012, this week we again hear from members of Franklin Templeton’s executive suite, this time on the subject of what they anticipate the U.S. presidential election could mean for investors.

Coming at it from the Templeton Global Equity perspective is the group’s CIO, Gary Motyl:

Obviously, the election will directly impact the U.S. market more than most of the global markets. Depending how the polls go, depending how investors interpret remarks by the various candidates, you may see a lot of movement in share prices, at least on a short-term basis. But at the end of the day, no matter who gets elected, it’s not going to have a huge impact on the direction of the U.S. economy over the next one or two years. We don’t really make projections on who is going to be president in 2013; what we do is determine if there are potential policy initiatives that would impact either specific industries or companies that we’re invested in.”

Ed Jamieson

Ed Jamieson

One thing both parties agree upon is dissatisfaction with the economy. But their accord seems to end there, with each party attempting to hold the other accountable for slow growth, persistent high unemployment and a recovery that limps along just ahead of recession. While partisan discord seems destined to affect the broader market this year, companies with solid fundamentals still hold prospects for growth.  Ed Jamieson, CIO of Franklin Equity Group, shares these thoughts:  

I think the election will probably have an outsized impact on the U.S. economy. We do have the budget deficit issue, and we have the debt overhang issue. And we have two parties that have really disagreed strongly on the proper role of government and the proper size of government in the U.S., so I think this should have a dampening effect on stock market multiples. But having said that, I think companies that do deliver earnings growth in 2012 can also show very good capital appreciation potential.”

The continuing deadlock between Republicans and Democrats over nearly every economic policy, really brings into question how much can even be accomplished before the election. And, if the caucuses and primaries are any indicator, negative rhetoric could hit an all time high (or low, depending on your perspective), which does little to alleviate market volatility. Even so, Peter Langerman, CEO of Mutual Series, believes that political uncertainty can play a positive role in generating new opportunities for investors: 

Peter Langerman

Peter Langerman

Certainly markets will be focusing on the election. What we try to do here at Mutual Series, again from a bottom-up company perspective, is determine the impact if X or Y or Z happens. For example, early in the bama administration, as healthcare legislation was working its way rather erratically through Congress, there was a lot of uncertainty about what that legislation might mean for various health management organizations, drug manufacturers, etc. We found some of the best opportunities to put money to work when that overhang existed because of exaggerated concerns about what the effects would be. We look to take advantage of those same kinds of opportunities. For instance, whether it’s concern over, say, what a Democratic Party reelection could mean for defense companies or healthcare companies or perhaps thoughts about what Republicans taking both the presidency and congressional houses might mean for banks, we try to anticipate the overreaction in the marketplace to those kinds of sentiments. And I believe firmly that we’ll have those kinds of opportunities.  I’m quite sure that kind of analysis and that kind of concern, and to some extent, panic, on the part of the market generally, will create some good opportunities for us in the next six to 12 months.”

So there you have it: three distinct perspectives, each adhering to the fundamental concept of analyzing specific potential impacts to individual industries or companies, as opposed to focusing primarily on macro movements.

Of course, as Sir John Templeton famously said:

“No method has ever been devised which will predict the trend of the stock market with consistent success.”

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