Event Driven: 2008 Elections – Primaries

Which stocks will benefit or suffer under which candidate?

ROBBERT VAN BATENBURG & WILSON MUI, LOUIS CAPITAL MARKETS

Summary

The primary election for the next President of the United States has started. We highlight the key policy proposals of the candidates with the highest odds of becoming the party nominee to determine which stocks and sectors may benefit or suffer when he/she gets elected.

Thesis

All candidates have an alternative energy plan, and the alternative energy and farming sector (except under McCain) stand to win big no matter who wins the election. The same is true for the education sector, which is a priority with most candidates. In case of a Democratic victory, the healthcare and defense sector will be the major losers as well as companies employing low-wage workers. Homebuilders and heavy polluters like utilities and cement companies may actually benefit. In case a Republican wins the White House, the pharma and defense sector are safe while construction and oil and gas exploration companies may benefit. Life insurers and tax service companies may suffer.

Candidates and key issues

Hillary Clinton: Wants to balance the budget and extend the middle class tax cuts. To promote the environment she proposes emission reductions via a cap and trade system for carbon emissions, renewables that will generate 25% of electricity by 2025 and an increase in fuel efficiency standards to 55 mpg by 2030. She forecasts that her environmental plan would reduce gas emissions by 80% from the 1990 level. Her environmental plans will benefit alternative energy companies and mostly Japanese carmakers. It would benefit heavy polluters such as utilities and cement companies, as they would receive a large number of carbon credits (based on their current CO2 output).

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After receipt of these CO2 credits, these industries can cut emissions and sell their credits for a profit. Cemex for example can transfer more cement production to Mexico and sell their carbon credits. Clinton proposes a freeze on adjustable rate loans and $6 billion of assistance to help distressed homeowners. This may benefit homebuilders who have seen exacerbated price pressures from foreclosed homes returning to the market. Clinton plans to cut 500,000 government contractors and seeks to reduce US presence in Iraq, which would hurt KBR especially. Her healthcare plan proposes to rein in insurance companies, cover all Americans either with private or public coverage and to cut $4 billion from prescription drugs expenditures. This would be negative for healthcare companies, especially HMOs [Health Maintenance Organisation] and branded prescription drug makers. Her plan to raise minimum wages is likely to hurt restaurant companies like McDonalds. To promote education she proposes a $3500 tuition tax credit and expand Pell grants1.

Barack Obama: Plans to fight for fair trade, abolish tax breaks for the rich and end tax haven abuse. This would hurt Bermuda-based companies such as Tyco, Frontline and Ingersoll-Rand as well as private equity groups. He also wants to raise the minimum wage and promote unionisation, while offering assistance to US carmakers. Industries with high union representation, such as airlines and heavy industry, may suffer. Obama also wants to promote net neutrality and diversity in media ownership as well as expand next generation broadband, which would benefit companies like Google and the broadband equipment makers. His environmental and healthcare proposals are very similar to those of Hillary Clinton. To promote the environment he wants to develop clean coal technology and a grid infrastructure that can accommodate renewable energy generation and smart metering and distributed storage. This benefits metering companies like Itron and grid equipment suppliers like Emerson and ABB. His healthcare plans would be negative for big pharma and health insurers. Homebuilders may benefit from his plan to avoid foreclosures via a universal mortgage credit. Obama also wants to establish a credit card bill of rights to protect consumers, which would be a negative for credit card companies like Capital One.

John McCain: Wants to cut taxes for the middle class, including repeal of the AMT [alternative minimum tax] and overall promote saving and investment and reform Social Security. He wants a ban on new cell phone taxes and to provide everyone with $2500 tax credit for individual health insurance, which would clearly benefit insurance companies. He wants to promote clean coal, potentially in cooperation with China and a market based system that caps emissions. Clean coal technologies are developed by Chevron, Arch Coal and McDermott. McCain wants a greater military commitment in Iraq and eliminate wasteful spending. The latter would hurt government and defense contractors. McCain has especially scrutinised Boeing in the past, regarding its fuel tanker contract. Conversely, companies like British Aerospace would benefit from a boost in the military presence in Iraq, now that it owns Armor Holdings (body armour) and United Defense Industries (armoured vehicles).

Rudy Giuliani [withdrawn, at time of printing]: Strongly promotes fiscal discipline, cutting taxes and reforming the tax code. He wants to expand the use of clean coal, natural gas and nuclear power.

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The latter benefits companies like the Shaw Group. Giuliani wants to streamline the FDA [Food & Drug Administration] approval process, which helps the pharma industry. He wants to build a high-tech fence to protect the US-Mexico border, as well as introduce a tamper-free biometric ID card. This proposal benefits companies like L1-Identity, Cogent and Granite Construction. To promote healthcare coverage, Giuliani wants tax benefits for those who are unable to obtain employer-sponsored health insurance. This plan should benefit the health insurance sector.

Mitt Romney [withdrawn, at time of printing]: Has many of the same proposals as Giuliani. He too promotes fiscal discipline and wants to lower corporate taxes and eliminate taxation on savings from the middle class and the death tax, which would hurt the life insurance sector. He wants to expand the use of nuclear power but also increase domestic crude production. The latter would benefit domestic drilling companies. He wants to increase military troop levels by 100K. Romney also wants to build and repair America’s transportation infrastructure, which benefits infrastructure builders like Fluor and, like Giuliani he wants to reform Sarbanes-Oxley, which benefits investment banks.

Mike Huckabee: Was once Chairman of the Interstate Oil & Gas Commission and may therefore promote domestic oil and gas drilling as well. His affiliation to the Mid-West makes him a supporter of farm interests, which would benefit companies like Monsanto and Deere. Huckabee wants to completely eliminate all federal income and payroll taxes and replace them with a consumption tax. This proposal would be negative for tax service companies like Intuit and could seriously reduce consumption growth. US consumers represent 20% of global GDP and as a result global growth related names like basic materials and the consumer discretionary sector could suffer. Huckabee believes in expanding the army and military spending, which would benefit the defence sector. He also proposes building a US-Mexico border fence and prevent amnesty for illegal immigrants and punish companies who employ illegal immigrants. This plan benefits fence builders like Granite but hurts those that cater towards the Latino community, such as Entravision.

1. Federal grant programme, based on need and family income less than $30k pa


Biology

ROBBERT VAN BATENBURG

Robbert Van Batenburg is Head of Global Research at Louis Capital Markets. Prior to joining LCM,he worked in Institutional Research Sales at Exane-BNP Paribas, having previously worked in Institutional Research Sales at Metzler Securities. He has a Masters Degree in International Finance from Columbia University and a Bachelors of Finance from Erasmus University.


Update

ELECTIONS

McCain’s GOP primary victory is more or less secure. He now has 613 delegates and needs 1191 to win GOP nomination.

The Democrat candidate needs 2025 delegates to win the nomination. Next up are Louisiana (68 delegates) and Nebraska (31 delegates) who vote on February 9. Obama will likely get a majority here. On February 10, Maine (34 delegates) will vote, and Clinton may win a majority here.

Next up are Maryland (99 delegates) and Virginia (103 delegates) on February 12, but more clarity should come on March 4, when Ohio (162 delegates), and Texas (228 delegates) vote.

Democratic primaries may drag on until mid-May if it remains a neck and neck race. Unlike GOP, which is winner-take-all, Democrats allocate delegates in proportion to votes.