Expert View: We can't run from Bush, but we might do from shares

I recoiled from reports which said investors 'can now stop worrying about markets'
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The Independent Online

The re-election of Margaret Thatcher in 1987 provoked one of my closest friends to emigrate. He lives now in New York and, as a good Democrat, last week's depressing re-election of George Bush made me enquire as to his future plans. But his problem, our problem, is that Mr Bush's strengthened grip on power in that economic and military colossus means there is no escape anywhere on this globe. I texted: "What are you going to do - leave the planet?"

The re-election of Margaret Thatcher in 1987 provoked one of my closest friends to emigrate. He lives now in New York and, as a good Democrat, last week's depressing re-election of George Bush made me enquire as to his future plans. But his problem, our problem, is that Mr Bush's strengthened grip on power in that economic and military colossus means there is no escape anywhere on this globe. I texted: "What are you going to do - leave the planet?"

It is this which has made me toss aside most market commentators' reports in anger in the past few days, as they have expressed relief that investors "can now stop worrying about markets and focus on the real issues". Nonsense, the re-election of Mr Bush is the real issue for markets. Now, and, I fear, for many years to come.

Last week's surge in equities surprised most European clients I spoke to - one called it a "shock and awe rally". But it was actually quite easy to understand. To some extent, it was simply relief at a quick and clear result. It also reflected a belief, particularly on Wall Street, that Mr Bush was somehow more business friendly - though it was hard to see a real difference between the two candidates on this point, through the fog of election rhetoric. The exception would be in attitudes to drug and oil groups, and their shares rallied accordingly.

That was equities. The reaction in two other markets was somewhat different, and may be a better pointer to future trends. US treasury bonds and the US dollar were heavily sold as investors returned to worrying about the ballooning US budget deficit.

For Mr Bush has been employing narcotic economics. Through massive borrowing, he has been able to give the US economy a one-off shot in the arm. This has led to the recovery euphoria of the last two years. But the fall in the dollar and in treasuries shows the difficulties the President may have in maintaining his supply. Hence the danger. The US is coming down and this trip will be painful.

This danger was underlined by news of a softening of US economic indicators and a drop in confidence reported among American chief executives. Both news items were lost in the noise of election day.

If these economic fundamentals were not enough to undermine confidence in equities, then consider also the event risk premium. Osama bin Laden's dramatic 11th-hour election broadcast may have helped Mr Bush, but it should also make investors realise that terror continues as a risk factor for markets. Talk of an emboldened President seeking to sort out the Iranian "problem" in his second term can be thrown in for good measure.

These political and economic fundamentals will overshadow all the main capital markets for the next four years. Investors need to find other places for their money. I predict a frenzied search for alternative investments.

The tech wreck in equity markets has already given these alternatives some momentum. High-yielding credit, global emerging markets, real estate and hedge funds have all been seeing increased interest. With the exception of hedge funds, which seem just not to like flat markets, this trend seems likely to accelerate dramatically.

This is not to deny that a slowdown in the US economy will effect all capital markets, but with alternatives the fundamentals are simply better. Take European real estate, where experts predict 9 per cent per annum growth over the next five years, or emerging markets, which could enjoy even higher returns. The structural shifts in the global economy will gain momentum if the main street of investment is gridlocked.

Four more years. I can hardly bear it. Will investors?

Christopher.Walker@tiscali.co.uk

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