Joss Mitchell: US healthcare and energy will benefit from Obama action

Published on Saturday 14 February 2009 12:32

A$787bn (£548bn) economic stimulus package aimed at boosting the US economy came a step closer after being passed by the Senate and House of Representatives.

It is smaller than originally planned and more skewed toward tax cuts, with 36% earmarked for reducing taxes and 64% in spending and money for social programmes. Running to more than 1,000 pages, it includes new road-building, cash to pay police in hard-up cities and tax breaks for house and car buyers.

The American Recovery and Reinvestment Act, the largest spending plan the US has ever seen, is now heading for the White House. It could be signed by President Barack Obama as early as tomorrow and should generate new hope for the US economy and, in turn, for the UK.

But nothing is assured. So far there has been no "Obama bounce". In fact, his inauguration day saw the steepest inauguration stock market drop in history. Yet investors who hope to tiptoe back into the market can find some encouragement from the new President's first weeks in office.

So what effect might his policies have on the economic sectors and what does it mean for investment strategies?

Our investment strategy team believes President Obama's policies are likely to include further regulation for the financial sector. There has been mention of the need for "sweeping changes", with particular focus on the derivatives and hedge fund industry.

By paying close attention to the speeches which have been made by him and his aides, it's fairly safe to predict that the sectors which will be particularly impacted are healthcare and energy.

Obama's plan to extend healthcare coverage to a further 8.5 million people is likely to reduce demand for healthcare insurance and therefore the profitability in this area. But the industry stands to benefit as more potential customers will be able to afford expensive treatments. This is likely to lead to higher sales volumes.

Obama's focus on green infrastructure will include mass transit, electricity lines and smart meters to take advantage of off-peak energy usage. This suggests that solar and wind power will see an increase in government support to help jump-start the economy. It is also expected that natural gas will be used for electricity generation while, in a key election pledge, the President is committed to reducing foreign oil dependence.

Therefore, the outlook for the US utilities sector is likely to be somewhat split because of the threat of greenhouse gas emission taxes, opposition to new coal-burning power stations and obligations on utility companies to generate at least 25% of non-fossil energies by 2025.

Consumer staples are also likely to benefit from the fiscal stimulus and tax relief packages. If the dollar remains strong, this should benefit retail suppliers' stock purchasing power and keep profit margins at adequate levels.

Consumer discretionary spending is unlikely to stage any recovery until there is more confidence in the economy. Only rising employment and a house price recovery will prompt consumers to stop hoarding cash and be a little more frivolous.

Obama is expected to turn his focus away from banks and towards corporations and consumers, where he has promised $775bn in tax cuts. Some taxpayers can expect to receive $500 in tax relief while corporations will be granted the ability to offset profits made in the previous five years.

Our view is that the impact of the Obama presidency on the US industrial sector may be relatively muted. That said, while taxes are unlikely to be cut in this area, infrastructure spending to support the economy is likely to support their future earnings.

This, in turn, should boost demand for materials, but a full-scale resurgence in this area is likely to depend on two factors. The US construction industry remains in relative limbo while commodity prices remain far below recent highs. These influences on the materials sector are not fully under the control of the Obama administration.

This is not the case regarding US telecoms and technology. Obama has been clear in his support of "broadband for all". His policy should support these sectors in the long run.