The Investment Column: Equities will suffer from a shift in US policy

The US presidential and congressional elections, nominally the world's most important electoral contest of the year, has turned out to be a rather dull and predictable affair, at least for the political commentators. For investors, however, the effect of the likely re-election of President Bill Clinton next week has been harder to gauge.

That he will be returned to the White House is more or less being taken as a foregone conclusion by markets. Mr Clinton has run a clever tactical campaign against an extremely poor effort by his rival, Senator Bob Dole, but has given very little away about the big issues. Once the election is out of the way, reducing the budget deficit and the policy of supporting a strong dollar are likely to again move up the new administration's agenda for action.

Meanwhile the Federal Reserve may feel less constrained politically in pursuing monetary policy. Fears that overheating in the economy will lead to renewed inflation could see the Fed act before the end of the year to raise interest rates.

The spillover from any shift in US economic policy is likely to have the biggest impact on UK equities. On one rather apocalyptic view, President Clinton may abandon the policy adopted in the first half of last year of talking up the dollar, leading to a run on equities around the world.

Albert Edwards, a strategist at Kleinwort Benson Securities, argues that the currency's strength has suited everyone's book. Both the Japanese economy, which teetered on the verge of deflation last year, and the continental European one have received a boost from the policy, which has helped make exports from both areas more competitive. At the same time, the strong dollar has acted as a brake on the strengthening US economy without the authorities having to resort to arise in interest rates.

The problem, Mr Edwards argues, is that Mr Clinton will be forced by the mounting trade deficit to abandon this policy, leading to sharp rises in interest rates to choke off the inflationary effects of a sudden weakening of the currency. That could have dramatic effects on equities.

He is forecasting a fall of up to 20 per cent in the Dow Jones index, leaving it languishing near the 5,000 level by the year end, and, although he believes the London market is exhibiting defensive qualities, it is inconceivable that there would not be some collateral damage from a Wall Street slump of that magnitude.

But while others see little signs that the new administration will want to reverse the dollar's appreciation, even some more sanguine observers expect US interest rates to start rising again.

Highlighting which shares are likely to be hit if there is a fall out from President Clinton's policies is tricky. Earlier this week, the UK drugs sector fell out of bed as fears swept the market that he would again attempt to clamp down on the drugs bill to help curb the government deficit.

Casualties of any new assault on the drugs spending would obviously include the likes of Glaxo Wellcome, SmithKline Beecham and Zeneca, given their exposure to the big US market for pharmaceuticals. Another company clearly in the firing line in the wider attack on health is BAT Industries, given President Clinton's antipathy to the tobacco industry, although the shares are already discounting much of the worst. Others likely to suffer are Smith & Nephew and Vickers.

All is not gloom, however. Drugs companies would be beneficiaries of possible moves initiated by Mr Clinton to speed up approvals of new drugs by the powerful Food and Drug Administration.