Investors and the Obama factor

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Arguably the biggest challenge for new US president Barack Obama will be the state of the economy. But which shares will be the winners and losers under Obama's administration?

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Edmund Shing, BNP Paribas

The incoming Obama administration has proposed a supplementary economic stimulus package worth some $825bn, of which one-third is to be dedicated to tax cuts for US households and businesses, and two-thirds to boosting investment through various government programs.

Tax cuts ($275bn): A $500 per person, $1,000 per couple boost to household finances will undoubtedly be welcome. But the combination of historically high US household debt levels and rapidly increasing unemployment point to this cash being saved rather than spent, providing little help to the retail or autos sectors that are suffering from the drop in consumer spending.

While tax cuts for businesses will help support corporate profits in the short-term, the ongoing difficulty of obtaining bank credit remains a crucial stumbling factor in investment decisions, suggesting that capital goods and technology stocks will not benefit from a near-term rebound in business investment.

Government spending ($550bn): Spending on infrastructure maintenance (roads, public buildings) and on improving energy insulation in houses will help the construction sector, where European companies are typically the biggest US players in the provision of cement, concrete and insulation materials.

Investment both in public transportation and in improving the national electricity grid will boost orders for European engineering companies involved both in power generation/transmission and train-building.

European renewable energy companies in the wind and solar sectors should also get a sizeable boost as $8bn is proposed as loan guarantees for renewable energy projects, after a slump in renewable energy companies' share prices linked to the collapse in the crude oil price.

But a word of caution: while this package should prevent this recession turning into a 1930s-style depression, it is not a "silver bullet" for the US economy's ills. A key cause of the financial crisis, the huge run-up in household debt levels, will take a long time to work off through higher savings levels, during which time consumer spending, and thus economic growth, will remain subdued.

David Buik, BGC Partners

The expectations for Barack Obama are ridiculously stratospheric. Were he to achieve one third of his agenda during what will probably be an eight year Presidency, it will be a miracle.

One thing is for sure is that he will be 'throwing the kitchen sink' in terms of fiscal packages in an attempt to lead the US economy out of this very damaging recession. He has already served notice in acknowledgement of the acute state of disrepair the banking sector is in, by asking Congress to agree to the next $350bn tranche of TARP, the bank bailout programme.

He has also promised to contribute $100bn to ailing home owners. There is little doubt that Congress will eventually have to acquiesce to significantly more than the $700bn that has already been agreed in principle. The banking sector has already admitted to write-downs totalling $1 trillion. Many suspect that that figure could double by the end of 2009!

Mr Obama has already made it clear that he intends to upgrade transport and public services.

Difficult sectors

Let's deal first with the sectors that should probably be avoided during the coming year. The cost of drugs has always been one of the banes of the Democrat's life and I suspect that they'll do something about it - perhaps not for six months.

However, in six months time, margins on the likes of Pfizer, Merck, Schering-Plough and Bristol Myers Squibb will narrow and should probably be given a wide berth, if the US government is determined to get down the cost and therefore the profit generated by drugs.

In terms of oil and energy, the price of crude remains appetisingly low and therefore having seen suggestions that the profitability of Exxon Mobil and Chevron may come under pressure, this sector should be avoided for the time being.

The likely winners

However, some energy companies could benefit hugely from the Obama drive against poverty as well as his commitment to green energy policies. It may be worth giving due consideration to companies such as SunPower and Duke Energy.

There is no doubt that with construction and the public sector receiving the President's initial undivided attention, perhaps there is some merit in owning Du Pont, Caterpillar, Honeywell, Deere, Monsanto and Tyson Foods.

The world is also likely to remain a very troubled place. Therefore like it or not, Mrs Clinton, the US is going to need serious defence requirements with Raytheon, Lockheed Martin, General Dynamics, Northrop Grumman and United Technologies looking the pick of the pack.

Most airline companies have been rubbished in the past five years - some of them have even paid a visit to [bankruptcy protection under] Chapter 11. However, with oil prices likely to remain low for certainly two years, a modest punt on the likes of Delta, US Airways (well done that pilot!) may prove a profitable sortie.

Education has already had a decent run on the rails in anticipation of the Obama syndrome. However, the market doesn't feel good at this moment in time; so this sector may come back in the next few weeks. So when the sun is high on the yardarm in the marry month of May, it might be not the stupidest thing to do to buy some Apollo and ITT Educational Services.

Retail and housing

The housing sector has been trashed to ribbons in the last two years. If President Obama means what he says, perhaps a few of the house builders such as Toll Brothers, KB Homes, Lennar and DR Horton could be worthy of consideration - but perhaps not until the spring.

Finally, it might be folly to dismiss retail if the fiscal packages are remotely encouraging to get people down to the shopping malls. The likes of Wal-Mart and Target speak for themselves but hopefully before too long, JC Penney, Nordstrom, Family Dollar, Dollar General, Abercrombie & Fitch and Macy's could well receive some positive attention from investors.

Initially, it may be prove sound to just wait and see how equity markets settle down and how deep the recession appears to be. However, faint heart never won fair lady! So, don't wait until the horse is bolted and be prepared to feel a little pain.

In closing the banking sector will offer huge opportunities but maybe discretion could just be the better part of valour for the first part of this year! The odd modest investment in a regional bank could prove sound as there surely has to be some rationalisation of this sector.

There are too many banks of this nature to cope with the whips and scorns of time which the current economic consistently throws up.