Political gridlock in the US could be beneficial for US equities, although issues such as a renewed government shutdown cannot be ruled out, fund managers and economists have said.
The US mid-term elections tipped the balance of political power in favour of the Republicans last week, as the party gained seven seats and secured a majority in the Senate for the first time since 2007.
This means the party now has control of both chambers of Congress, dealing a heavy blow to Barack Obama’s party.
Some commentators have speculated that this shift in political power could be positive for US equities, although risks, such as a repeat of last October’s government shutdown, were also seen as a possibility.
Paul Dales, US economist at Capital Economics, said in a note: “We can’t completely rule out a shutdown.
“With the Republican nomination for the 2016 presidential election wide open, refusing to raise the debt limit would be an easy way for nominees to garner support from Tea Party Republicans.”
However, Mr Dales also noted that while he didn’t rule it out, he thinks the chances of a shutdown were “slim”.
Rathbones’s James Thomson said political decision-making would now be “stuck in the mud”.
The global equity manager added now Mr Obama had lost control of the Senate, it meant the president would be considered a “lame duck”.
However, friction could be created, given that the Republicans will need bipartisan support for legislation as they did not secure the necessary 60 Senate seats.
“I don’t see much change until both the executive and legislative branch are the same party, which could be in the next presidential election,” Mr Thomson said. He added this could be beneficial as “investors prefer less meddling”.
The manger has placed large bets on the US in his £450m Rathbone Global Opportunities fund, although he is not planning to increase his allocation in the near future.
Mr Thomson’s 69.1 per cent position in the US is significantly higher than the neutral weighting of the fund’s benchmark, the FTSE World index, which was 51.2 per cent at the end of August.
David Page, senior economist at Axa Investment Managers, said there could be a period of greater co-operation and, if that were the case, equities would stand to gain from the political movement.
“Historically, equity markets have tended to make some of their biggest gains in the quarter of the mid-term elections and after,” he said.
“We have been through a period of non-co-operation, [but] we are now entering a less destructive period... if not a productive period and the markets will benefit. It is not clear how far this period will go, but that is the direction it is heading.”
Sectors such as energy are expected to benefit from the political swing. The S&P Energy index rose 1.5 per cent last Wednesday as investors hoped the Republican control would lead to reforms in crude and natural gas export laws.
But the healthcare sector may struggle as Republicans have been very vocal on their stance towards Mr Obama’s flagship policies, dubbed ‘Obamacare’, and have expressed a desire to repeal the Affordable Care Act.
There will also be longer-term benefits from the power swing, according to Stephanie Flanders, chief market strategist at JPMorgan Asset Management, who noted that trade deals could assist the market.
