October 3, 2012

Investor Pitfalls, Profits Abound Depending on Political Winds: Janus Panelists

Health care plan, fiscal cliff and even food sources could affect stocks

Even before the first presidential debate on Wednesday night, experts suggested that the health care sector, as well as dividend-bearing stocks, among others, offered good opportunities regardless of who goes to the White House in January.

Participants in a Web roundtable discussion titled “Investing and Politics,” sponsored by Janus Capital Group, offered a variety of tips for advisors and investors based on their perception of the coming presidential election and the world economic situation.

During the discussion, which ranged widely from comparisons of the present state of the economy to the 1970s and 1980s and the role government policies and confidence play in the country’s economic health, speakers touched on everything from the size of the national debt to the need for food to remain at an affordable level.

Hosted by Richard Weil, CEO of Janus, the discussion was moderated by Stephen Moore, senior economics writer for The Wall Street Journal. Its panelists were Peter Atwater, president of Financial Insyghts; Jonathan Coleman and Gibson Smith, co-chief investment officers for Janus; and John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and George P. Shultz Senior Fellow in Economics at Stanford University's Hoover Institution.

Asked for specific recommendations for advisors and investors, Smith said his biggest concern about the election and the future is the divergence between technicals and fundamentals. Liquidity in the markets, he said, is causing a bigger divergence. He also expressed concern about the credibility of central banks with regard to quantitative easing policies.

Coleman pointed out that an Obama re-election would likely result in the Affordable Care Act providing a volume increase for insurance companies and resulting in a likely taxation issue. On the other hand, a Republican victory would likely see a repeal of the ACA’s subsidies and exchanges, which he said would reduce the flow of individuals into exchanges and limit the impact on that sector.

He cautioned investors to consider the economic environment when choosing investments, and said that “strained resources and a more challenging environment” could offer opportunities in companies that help control costs in healthcare systems, such as pharmacy benefit managers engaged in limiting the growth of pharmacy costs. “Novel therapeutics” that target such problems as hepatitis C and similar diseases would also offer promise, “regardless of who’s elected.”

Coleman also suggested that the financial services sector would be heavily influenced by election results, subject to the full impact of the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB) playing a major role in the case of a Democratic victory. Republicans, on the other hand, would try to bring the CFPB under congressional authority. The energy sector, too, would see very different outcomes depending on election results, with taxation and regulation both factors to consider.

Questions for the panelists ranged from tax increases, the fiscal cliff and the social safety net to the effects the situation in Europe and the possibility of a slowing Chinese economy could have on the economy and investors’ choices.

While there was concern that higher taxes on dividends could result in lower valuations for dividend-paying companies, Coleman doubted that would be the case. People have a “desperation for yield” that would overcome any concern about taxes–and, in fact, he said some CEOs had indicated that they were considering higher or special dividends in 2013 as possible offsets to potentially higher taxes.

Regarding the fiscal cliff, Taylor pointed out that it “didn’t come from outer space,” but was a policy creation by Washington that Washington would have to solve.

Atwater had addressed the subject of the cost of food when discussing food stamps and other government safety nets, pointing out that if food becomes unaffordable, “you have an environment that resembles … Egypt, and you don’t want to go there.” He also mentioned what he termed the “locavore” phenomenon, and said the demand for more food produced locally, since it affects goods, jobs and services, could have a detrimental effect on transnational companies.

Saying that he was bullish on a slowing economy in China because times of social unrest offer opportunities of a different sort, Atwater also suggested that investors should look for businesses that do well in a low-confidence environment: domestic supply, sourcing, storage and backup. “We want redundancy [in that kind of environment],” he said, adding that another area investors should consider in times of low confidence are “businesses into scrutiny and surveillance … ‘Big Brother.’”

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