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More hedge fund managers see Kerry victory

In early June, all 37 hedge fund managers surveyed by International Strategy & Investment thought George Bush would win a second term, but by last week, 53 percent were expecting a John  Kerry victory
/ Source: Reuters

It might be too early to say Wall Street’s money managers are warming to the idea of John Kerry as president, but an increasing number are taking the idea seriously.

In early June, all 37 hedge fund managers surveyed by International Strategy & Investment thought George W. Bush would win a second term, but by last week, 53 percent were expecting a Kerry victory.

For mutual fund managers, the figures have not changed much, with about 80 percent still seeing Bush back in the White House.

On electronic betting exchanges like Dublin-based Intrade, the odds of Bush’s re-election slipped from 75 percent in January to a low of 49 percent in mid-July, before regaining some ground to 54 percent Monday.

Although many have concerns that Kerry’s environmental and health-care policies could dampen profits of energy and pharmaceutical companies, some think the Democratic candidate can safely guide the economy and improve foreign relations. His emphasis on fiscal discipline, in particular, scores votes and even money from wealthy Wall Street backers.

“There are a lot of people here who have second thoughts about the war (in Iraq),” said Robert Hormats, vice chairman of Goldman Sachs International. “And there are far more than that who are concerned about fiscal responsibility in Washington.”

Friday’s White House report saying the U.S. budget deficit will hit a record $445 billion this year stoked those concerns. Kerry has pledged to cut the deficit in half over the next four years.

Democratic gains
“Once you get the budget under control, a lot of good things happen,” Hormats said. “Kerry will be good for the economy, and therefore good for the markets.”

History supports that notion. A Merrill Lynch study going back to 1943 showed the stock market returned 13.6 percent during Democratic administrations, more than the 11.7 percent it yielded when Republican were in the White House.

Some industries may actually benefit from a Kerry presidency. Alternative energy stocks, for example, could get a boost from the candidate’s support for increased use of renewable energy, Smith Barney analyst David Smith said in a recent note to investors.

Even some defense stocks, long seen as Republican beneficiaries, could hold ground under Kerry. While the industry as a whole is vulnerable to cuts as the Iraq war winds down and the federal deficit takes center stage, a shift in priorities could boost some defense stocks over others, analysts say.

Bush came into office with the goal of transforming the military into a technology-savvy, networked system that could fight wars with fewer troops. But critics say that vision has left the military too thin, and Kerry has proposed 40,000 additional active-duty troops. Outfitting and equipping them will cost money.

“One thing that belies the stereotype, that mitigates against any investors selling defense stocks in the event of a Kerry victory, is the fact that Kerry has proposed 40,000 more troops and almost outflanks Bush,” said Charles Gabriel, senior Washington strategist at Prudential Equity Group.

He said the “good old Army contractors” like General Dynamics Corp., Armor Holdings Inc. and Alliant Tech Systems stand to gain.

No clear direction
Beyond defense, energy and health-care, investors have had a tough time identifying industries that would be affected by a Kerry presidency, especially if Republicans dominate Congress.

“It’s not like he is running on some clearly defined program,” said Steven Bleiberg, head of global investment strategy at Citigroup Asset Management. “It’s hard to figure out who’d be the winners and losers.”

One major worry on Wall Street pertains to Kerry’s tax policy. The Democratic hopeful plans to roll back recent tax cuts for people with incomes over $200,000. Economists say that would undo the fiscal stimulus that fueled consumer spending, the heart of last year’s economic rebound.

Upscale retailers such as Neiman Marcus Group Inc. and Nordstrom Inc.  have reported solid sales growth this year, while discount stores like Wal-Mart Stores Inc.  have said steep gasoline prices are pinching consumers’ pocketbooks.

As it stands, consumer spending rose at a paltry rate of 1 percent during the second quarter, the smallest increase since the 2001 recession.

As investors wrangle over new terrorist warnings and worry about whether corporate America can sustain profit growth, uncertainty about the government’s regulatory orientation in coming years remains a vexing question.

Byron Wien, Morgan Stanley’s chief U.S. strategist, expects stocks to improve during the second half of 2004, in part because by then the Kerry question will be settled.

“Fear of change seems worse than actual change,” he wrote in a report last week. “And I think that will be true this year as well.”