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Resounding cheers around the world greeted Barack Obama's election as U.S. president, but the world did not put its money where its mouth was. Stock markets nearly everywhere sank in the days that followed.
Plunging markets have been commonplace for months, and Obama was a short-priced favorite, so the timing could always be coincidental. But anxiety over what he will do when he is handed the keys to the White House is likely to account for some of the decline.
Investors might expect a Democratic president with populist appeal and a very liberal voting record during his brief tenure in the Senate to shape policies unfriendly to their interests, especially when both houses of Congress have large Democratic majorities. The biggest concern, and the biggest threat to portfolios, may be certain measures intended to protect American workers; they stand a better chance than others of being approved.
Many items near the top of Obama's wish list will be out of reach for months to come. There is little money available to overhaul health care, and as much as he would like to redistribute the nation's wealth, there isn't a lot of wealth these days to redistribute. Taxes will probably go up eventually, but not yet.
Steps to encourage domestic job creation and limit the ability of American companies to hire abroad, on the other hand, would cost little financial or political capital up front. The same goes for a renegotiation of the North American Free Trade Agreement or an increase in tariffs on Chinese goods.
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No doubt such measures would be presented as necessary to defend the rights of workers at home or abroad, protect the environment, or redress some perceived unfairness like China's reluctance to let its currency float.
Interference in trade and labor practices, no matter how well intentioned, can exact a significant toll in the long run, however, on businesses, consumers, investors and the economy. Productivity, earnings growth and exports tend to decline, and inflation often rises.
The prospect of heightened protectionist fervor has become a hot topic among investment advisers, although levels of concern vary. Tobias Levkovich, Citigroup's chief U.S. equity strategist, said the president-elect “has some pretty centrist advisers on economic issues,” like Warren Buffett and Paul Volcker, the former Federal Reserve chairman. Levkovich said he was “not overly worried now.”
As the election approached, a paper by Research Affiliates, a Los Angeles asset manager, warned, by contrast, that a fresh wave of trade barriers might be “the most significant geopolitical change on the horizon that could perhaps alter our expectations for the future of capitalism.”
Research by Saxo Bank, a Danish institution, offered several possible outcomes, including a “base case” forecast of higher tariffs on some imports and greater impediments to global trade during the next four years. Under its worst-case outcome, global economic output would fall by 20 percent over that period.
That is not the sort of climate in which stocks flourish. Emerging markets could suffer most as employment flags and access to U.S. consumers is restricted. More trade barriers probably would hurt U.S. investors, too, especially in segments of the economy that globalization has benefited most.
“If you expect protectionism from the Obama administration, then you should avoid industries that outsource aggressively overseas or that rely more heavily on immigrant workers, as well as industries that distribute foreign imports,” said Jason Hsu, head of research and investment management at Research Affiliates.
The biggest impact might be on U.S. software providers, which employ many programmers abroad, and hardware manufacturers, which rely on foreign labor to produce components. Low-cost retailers like Wal-Mart would probably suffer too, Hsu said.
The best anti-protectionism asset, in Hsu's opinion, provides protection of a different sort. The prospect of higher prices and lower economic growth make inflation-protected government bonds a sound choice. Some domestic manufacturing industries, like steel, could see their fortunes improve, but carmakers, which have all but lost their ability to compete with foreign rivals, may be too far gone.
“Current economic conditions may be so severe,” Hsu said, “that nothing short of an outright government subsidy or bailout could save them.”
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