The Obama Victory

09.11.08

Barack Obama’s historic election victory in the US is seen by many as a pivotal event. Aside from the extraordinary symbolism that comes with the election of the first African-American US president, a victory for the Democrats signals a turn away from current Republican policies and agendas.

Obama won the US presidency on a platform of change. And change will have wide implications – not only for the US economy but for economies and financial markets globally.

US Policy Will Change

US policy will change. Though the Obama Administration has promised change, it is important to recognise the fact that they also have a reasonable capacity to implement change via an increased Democrat majority sitting in both tiers of Congress. The key aspects of an Obama Administration are likely to be:

• a new, large fiscal stimulus package to be enacted in the new year, although the scope of this package will be limited given the huge borrowing program already in the US;
• more active government intervention to prevent home foreclosures and increase bank lending, particularly by banks receiving government assistance;
• tax cuts focused on low and middle income earners, but tax increases for high income earners (back to pre-Bush top marginal tax rates);
• an increase in tax rates on dividends and capital gains from 15%, but possibly only to 20%;
• increased regulation of business, particularly the financial sector (this in inevitable in most countries after the current crisis);
• increased government spending in areas such as health, education and infrastructure;
• a commitment to free trade, but more incentives for US companies to create jobs in the US;
• more concern about the environment and introduction of a carbon emissions reduction scheme;
• a more multilateral approach to the ‘war on terror’ and to foreign policy generally.

What has this got to do with Australian/Global Equities Markets?

Although Australia’s reliance on Chinese growth remains a unique buffer in the current climate of global instability, it is clear that the eyes of the world continue to fall upon the US for answers. The fact remains that although subject to differing pressures and uncertainty, equity markets around the globe continue (in most cases) to take their lead from the US.
The global credit crisis and the market fear that followed originated in and spread from the US – it is therefore not unreasonable to assume that if US economic issues are addressed decisively and effectively by the incoming government, economies and financial markets around the world may be able to begin the slow process of healing.