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The Global Investor, our financial newsletter
  November 2004 - Issue 35 Previous Issues  

The Global Investor is a monthly newsletter that covers global investment opportunities and insurance for the expatriate community. This monthly newsletter's goal is to inform the reader of what can and cannot be done in the investment arena when living and working in a foreign country. Whether it's personal pension plans or disability insurance to protect your income - Global Investments has the expertise to handle all the expatriate investors' needs.


WHAT WILL THE U.S. ELECTION MEAN FOR INVESTORS?
A Special Report from Bob Doll, President & Chief Investment Officer, Merrill Lynch Investment Managers


As observers follow the presidential debates, review the latest polling data and watch a seemingly endless stream of campaign commercials, many are wondering what a Bush or Kerry victory might mean for financial markets. How would stocks and bonds fare under different administrations? What impact might a second Bush administration or a Kerry presidency have on, for example, healthcare companies?

In this Special Report, we take a look at some possible scenarios and consider what effects the election might have on investors. Predicting how financial markets may react to the presidential election can be a very tricky business. While the occupant of the White House and his policies certainly can affect how markets perform, at the end of the day, market fundamentals have historically proved to be far more important. We believe that asset allocation, valuations, earnings, yields and the other basic determinants of performance will have far more affect on an investor's portfolio than election outcomes will. With that in mind, however, we can make some observations based on the candidates' stated positions and can forecast some possible consequences.



Bob Doll is President and Chief Investment Officer of Merrill Lynch Investment Managers (MLIMŽ) and its investment advisory affiliates, including Mercury Advisors.

He joined MLIM in 1999 and has held a variety of senior management positions. Merrill Lynch Investment Managers has over US$488 billion in assets under management, as of June 30, 2004.

How much will the election impact the markets?
This is really the million-dollar question and, in our view, the answer probably is, "not as much as many observers think." It is important to remember that any campaign promises eventually will have to be passed and funded by Congress, so the Congressional elections may play as large a role as the presidential election in determining how markets may react. Assuming that the Republicans retain control of Congress, which we believe is likely, a Republican President Bush (in his second administration) would have a far easier time having his legislation passed than would a Democratic President Kerry. 

Whether either outcome would be good or bad depends on your perspective: A divided government with a President Kerry and a Republican Congress would likely result in legislative gridlock, which can be a positive environment for financial markets and investors, as was the case after the Republicans took control of Congress in 1994.

Furthermore, a Bush victory might have a less significant impact on the markets. Currently, the markets are marginally expecting a Bush victory, and any potential effects, positive or negative, that this might cause may already have been priced into the markets. Finally, it is important to remember that while we may see some specific sectors benefiting from a Bush or Kerry administration, over the long term, there tends to be little difference in overall market performance during Democratic or Republican administrations.

Bush for stocks, Kerry for bonds
Assuming that Bush's or Kerry's proposals can be put into legislation that can be passed (never a foregone conclusion), from a broad perspective, we believe that a Bush victory would be better for equity investors and a Kerry victory would be a win for bond investors. Bush's policies of reducing capital gains and dividends tax rates clearly favour equity investors, while Kerry's plans would reduce after-tax returns for equities because of his desire to reverse some of the Bush tax cuts. A Kerry presidency also would likely be more active from a regulatory perspective. For example, under Kerry, the Department of Commerce likely would be a stronger watchdog regarding potential mergers and acquisitions, which may be a negative for the equity markets. Bush's proposals for privatizing social security would likely direct more money into equities, which could raise stock prices.

Fixed income investors would likely do better under a Kerry administration, due to his campaign platform of deficit reduction. Kerry's tax plan, which would eliminate some of the Bush tax cuts for high-income taxpayers, would also benefit bond investors. In particular, tax-exempt municipal bonds probably would perform better under a Kerry administration, as the tax advantages of these securities would become more valuable.

Our prediction
For the past year, we have been saying that we believe the Republicans would "convincingly" win the 2004 elections, based on the advantages of incumbency, the improving economy and the Republican advantages in campaign dollars. While the situation in Iraq continues to be a wild card, we still believe that President Bush will win a second term. Regarding Congress, we would put the chances of Republicans retaining the House at 90% and the Senate at 70%.


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