There are two stock groups that do risk losing from a Kerry victory, dividend-heavy stocks and property & casualty insurance stocks. The dividend-heavy stocks are at risk from his tax program, but he would have to negotiate a tax deal with Congress, so as long as it looks as if Republicans will be in control, these stocks should not be affected.
The problem with the stock market is that investors were shocked by the sudden change in the direction of key global and US economic indicators. They wanted enough slowing in growth to hold back the Fed from draconic tightening in May. What they seem to be getting is a slowdown induced by China, extra-expensive oil, heavily indebted consumers, and the onset of the next phase of problems for technology companies. Oil was $32.50 at the end of the year, and seven months later it is up 33%. Until this latest heave calms down and reverses, the economy and the stock market will be stressed.
INVESTMENT RECOMMENDATIONS 1. Remain overweight energy stocks. Putin's recent behavior guarantees that Russian oil production is not going to grow as fast as the world is expecting. The International Energy Agency says the global petroleum deficit in the fourth quarter will be more than a million barrels a day. The oil companies' shares are still inexpensive compared to the rest of the market.
2. Remain overweight base metals stocks. Even at its current level of economic activity, China will continue to be a big buyer of commodities, and worldwide inventories of industrial metals have declined significantly, with no sign of significant new production starting soon. The latest data from China suggests that an overtaxed infrastructure of electricity plants, railways and port facilities could be a bigger problem for growth than new controls from Beijing. If so, then commodity demand to build the needed facilities will remain very strong—a conclusion reinforced by the renewed surge in prices of industrial materials.
3. Remain overweight gold stocks. The dollar's weakness could resume at any time and the total risk level in the global economy is rising, so if the economy continues to weaken, the problems created during the era of rapid debt buildup will begin to appear.
4. Within the financials, place more emphasis on regional banks and consumer banks, and less on global investment banks. The business of banking remains profitable, and is not too volatile. Betting billions of investment banks' funds has been very profitable, but is a risky move that could go bad if the economy disappoints and today's narrow spreads on corporate debt revert to normalcy.
5. The fact that Kerry is leading in the polls is undoubtedly bad news for the dividend-heavy stocks. However, as long as Republicans look likely to maintain control of Congress, there should be no rush to get rid of them because he would have to make a deal in terms of his tax increases. On the other hand, Bush as president is very good for oil stocks. At the moment, polls show the Republicans have a good chance of maintaining Senate control, and a better chance of maintaining control of the House.
6. It has been advised for a long time to avoid over weighting large pharmaceutical stocks, because they have short "reserve life indices." They are like oil stocks: it costs $900 million to get a new drug approved and there is about ten years to make money on it before it goes generic. This is equivalent to a new oilfield with a 10-year life. But these stocks always sold at growth stock multiples. Now they could face political problems. Kerry's drug proposals would be bad news for the big pharmaceutical companies, who have, in recent years, lost considerable support with the public and Congress.
7. Finally, the most positive news of all is that Kerry demonstrated that he has the leadership qualities that will help America to be strong in the War on Terror. If investors really have been selling stocks because they feared that Kerry would not be able to take care of Al Qaeda, they will be reconsidering their negativism.
Safe Harbor Clause The opinions, estimates and projections contained herein are those of George Haligua and do not necessarily represent the opinions of Hermes Bancorp as of the date hereof, and are subject to change without notice. Hermes Bancorp and the other Global Asset Managers believe that the contents hereof have been prepared by, compiled or derived from sources believed to be reliable and contain information which are accurate and complete. However, Hermes Bancorp make no representation or warranty, express or implied, in respect hereof, take no responsibility for any errors and omissions which may be contained herein and accept no liability whatsoever for any loss arising from any use or reliance on this report or its content.
