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Dale Jackson

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Energetic response

Dale Jackson


TORONTO (GlobeinvestorGOLD) — The United States is electing its president at a time when the country is divided and withdrawn from the world. Canada is just one of the industrialized countries to get the cold shoulder, but we are also the one that stands to lose the most. The outcome — no matter who wins — will have a profound impact on our economy, our equity markets and our own investment portfolios.

America’s drift toward isolation began with the election of the Republican Bush administration four years ago and was accelerated by the tragedy of 9/11. In late 2000 the foundations for protectionist walls were already being poured to limit Canadian lumber, wheat and steel exports. Canada’s single case of Mad Cow Disease in May 2003 sparked a ban on beef that has yet to be completely lifted. Just this month the U.S. Commerce Department announced it will slap anti-dumping duties as high as 15 per cent on Canadian hogs despite a Commerce department investigation that found no basis to charges that Canadian hog producers were receiving unfair government subsidies.

After 9/11 the Bush administration launched its "war on terrorism," turning its back on the fragile economic recovery, and running up a federal deficit exceeding $400-billion (U.S.). In Canada, rebuilding the health care system, gay marriages and the decriminalization of pot occupied our political agenda. The elimination of Canada’s deficit occupied the economic agenda.

The current political rift doesn’t change the fact that Canada still relies on the U.S. market as the destination for about 85 per cent of our exports, and a whack of capital investment to keep our economy growing. What might really hit home for the average Canadian retail investor is the likelihood that the bulk of the foreign holdings allowed in registered retirement savings plans (RRSPs) are either U.S. equities or international equities with a huge stake in the U.S. market.

When it comes to the economy you could argue the damage caused by the deep division within the U.S. has already been done. In 2000 George Bush won the White House by a few disputed votes in Florida, and it’s not certain he even won. Four years later, polls say the electorate is still divided right down the middle.

"It’s not the Democrats or the Republicans. It’s the uncertainty", says Art Hogan, chief investment strategist with Jefferies & Company in Boston. "Wall Street doesn’t like uncertainty in any event — and definitely not during a federal election."

One thing Art Hogan is certain of is how little impact the November election will have on the markets and economy in the longer-term. While Republicans are generally seen as pro-business, history shows markets have done as well — if not better — under the Democrats.

George Bush has won favour with business by cutting taxes for the wealthy minority and introducing a dividend tax credit. He’s secured that favour during the election campaign by painting John Kerry as a tax-and-spend liberal. The most obvious sector to benefit from this Republican administration is defence. "The defence industry has done well under the current administration because they started a war" says Mr. Hogan.

The energy sector is expected to continue thriving under a Bush government for two reasons: The first is the close ties between the Bush family, former Halliburton CEO and Vice President Dick Cheney — and the oil industry. The second is the roughly 10-per-cent fear premium on crude oil. The war on terrorism and the war in Iraq have helped drive the price of oil over $50 (U.S.) a barrel on supply concerns — sharply expanding profit margins for RRSP favorites such as Talisman Energy, Suncor, PetroCanada and Encana. Mr. Hogan points out that Canada is now the United States’ largest single oil supplier, and that bodes well for the future of the oil patch even if the price of oil falls.

Mr. Hogan says Republican tax cuts may also provide a short-term boost for the retail sector by leaving Americans with more disposable income but it’s hard to prove a direct link between tax cuts and retail spending.

John Kerry’s sector strengths aren’t evident but a Democratic victory could put technology back on track. The tech sector thrived under Bill Clinton in the 90s before it melted down and George Bush shifted his focus back to the old economy. Mr. Hogan says technology has been put on the back burner and overall valuations are now appealing. On the down side, Senator Kerry’s pledge to crack down on the cost of health care could shrink margins in the health care sector.

President Bush also starts looking better when you apply the "devil you know" theory. John Kerry’s political campaign rhetoric is laced with promises to continue expanding protectionist policies, which could hurt the Canadian economy. Mr. Kerry has also latched on to the outsourcing issue vowing to deny tax credits to corporations that move jobs out of the country, and that could hurt Canada too. According to the UN Conference on Trade and Development, Canada is only second to India in luring jobs away from our American cousins.

No matter what the outcome of the election, Art Hogan is bullish on the broader markets and economy, and advises Canadian investors to get into the markets — not out. In any event he expects markets to return to fundamentals in a few weeks. But he also expects the broader trends to continue, adding that "outsourcing and protectionism will increase regardless".

There’s one other, less quantifiable measure for determining which U.S. President is best for the Canadian retail investor. The saying that peace and prosperity go hand in hand rings true when you compare the past Republican term to the two Democratic terms in the 1990s. People invest for the long-term when they feel safe and secure. The primary market stimulus for the current Bush administration has been fear. If the U.S. continues to drift from the rest of the world and the deficit continues to spiral out of control, you’ve got to wonder how long that can last.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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