Obama’s 2nd term to be bumpy for stocks

By Vikram Barhat | December 19, 2012 | Last updated on December 19, 2012
3 min read

Now that the storm of the U.S. election has subsided, investors and money managers are pausing to reassess their investments.

The status quo doesn’t inspire confidence among investors on either side of the border. In the short term, managers are paring exposure to North American equities as nervous money takes refuge in the relative safety of treasury bonds.

Read: U.S. crisis could trigger Canadian recession

Given that no dramatic changes are expected in the current American accommodative monetary policies — and by extension Canada’s — the longer-term implications for equities are bleak.

Jack Ablin, chief investment officer, BMO Private Bank (Chicago), is already looking to emerging markets.

“We will likely take U.S. from an overweight position down to neutral, relative to our asset allocation benchmarks,” he said in a recent conference call. “And then take the incremental overweight and move that to emerging markets, which are trading at 15% to 20% discount to the U.S.”

Read: It’s risk-on again for emerging markets

The outlook in Canada is similar. Paul Taylor, chief investment officer, fundamental equities, BMO Asset Management Inc. also hints at selectively reducing exposure to North America.

“We will maintain our overweight in equities, but certainly will not add any equities at this point,” he says. “And if we were to roll back, it’d come from U.S., not Canadian, equities.”

By the same token, he remains “very modestly” overweight North American equities, favouring Canadian stocks over American ones.

Cautious optimism is conspicuously absent from investment conversations.

“If handled properly, the [U.S.] recovery that’s been running along at 1.5% to 2% will be prolonged and that’s good for Canada,” said Taylor. “But if there are any policy missteps, then it could be very challenging for the Canadian economic recovery.”

Read: Canadians cautious about investments

If the equities outlook is far from cheery, it’s positively dreary for bonds.

Taylor says “there is heavy lifting coming for the [U.S.] president,” adding, “The compensation offered on bonds is very skimpy for the risks we face. I’d reduce bond exposure and by default will end up with an overweight in equities.”

Head to the safety of names offering quality and yield, he suggests.

“In a low-return environment, lock in some juicy yields,” he said. “Try to ensure you spend more of your capital on large-cap, well-established companies with strong management teams and established products in important growing niches.”

Read: 5 reasons why stock picking is dead

However, there’s reason for alarm for investors who favour high-dividend-paying stocks.

They may no longer enjoy the current tax treatment of dividend payouts, which are presently taxed at 15%, but will soon be taxed as ordinary income — causing the rate to jump to about 40%.

Although this will largely impact U.S. investors, it’ll hit Canadian investors who hold dividend-paying U.S. stocks.

Read: Obama re-election could raise cross-border taxes

In light of that, says Ablin, focus on growth sectors such as technology, which yields long-term capital gains rather than dividends, and “is the least likely to be impacted by any policy change.”

As well, for tactical reasons, investors may want to avoid telecoms and utilities, which pay 4.8% and 4.2% dividends, respectively, relative to the 2.2% average for the S&P 500.

Finally, a spot of relief for gold bugs.

Ablin says there could be “some tailwind behind precious metals given that Obama will likely keep Bernanke and aggressive monetary expansion policies in place.”

Read: Seven picks for gold-hungry clients

Vikram Barhat