Daily Telegraph: Corporate America holds its breath

EXTRACT: …a swing to the left is likely to lead to ever more vociferous calls for policy initiatives such as windfall taxes, should a renewed spike in oil prices result in more sets of record profits for Big Oil such as BP, Shell and Exxon Mobil. On the flip side, companies that specialise in alternative energy sources could find themselves in a better position.

THE ARTICLE

David Litterick in New York analyses what the elections mean for business

It has been billed as one of the most important set of elections for a generation. President Bush may be safe in the White House for another two years, but on Tuesday the opposition Democrats, so long used to shooting themselves in the foot when it comes to elections, finally have a good chance of winning back control of Capitol Hill for the first time in more than a decade.  
 
The most recent polls put the Democrats on 53pc, with the Republicans on 40pc and 7pc still undecided. If they are right, the implication for the economy and corporate America could be far-reaching.

On the streets of the major cities and in the heartlands of middle America, it’s “the war versus the wallet”. Anger at the conduct of the Iraq war and US foreign policy generally has rarely run so high. Republican candidates for the seats on offer in the Senate and House of Representatives have distanced themselves from the President, while the Democrats are pushing hard to turn the election into a referendum on the war on terror.

But as previous administrations have found to their cost, the economy is equally important – and in the US, it’s slowing fast.

Falling house prices and rising petrol costs have left many middle-class Americans feeling vulnerable. Although the Dow Jones Industrial Average recently hit record territory, and the unemployment rate remains low, polls suggest there is a real fear that conditions are set to worsen, and many blame Bush.

Peter Morici, professor at the University of Maryland’s business school, believes pharmaceuticals giants such as Britain’s GlaxoSmithKline, AstraZeneca and US groups such as Pfizer and Johnson & Johnson, could have the most to lose if the Democrats successfully marshal their forces.

“If the Democrats win control of the House they are going to put a lot of pressure on the pharmaceutical industry, which they argue has been guilty of abuse of the Medicaid programme,” Mr Morici said. “They want to call the industry to task.”

The programme provides prescription drugs to the elderly but allows the drug majors largely to set the price of drugs themselves, while the government has little opportunity to negotiate.

“The Dems have a lot of angst over the programme that has been building over the past several years and there is a strong sense that it needs to be reformed,” Mr Morici added. “They are likely to make it a much less hospitable place to be doing business if you are a drug company.”

Democratic lawmakers probably wouldn’t succeed in changing the law during Bush’s presidency but the pharmaceutical sector would still face a “sentiment risk”, said UBS strategist Thomas Doerflinger.

Both men agree that energy is another sector likely to feel the force of a newly powerful Democratic Party. Mr Morici said: “When it comes to the oil companies, it’s in the Democrats’ DNA to believe that they are the most evil on the planet. They like to villainise them just like they villainise Dick Cheney.”

As such, he says, a swing to the left is likely to lead to ever more vociferous calls for policy initiatives such as windfall taxes, should a renewed spike in oil prices result in more sets of record profits for Big Oil such as BP, Shell and Exxon Mobil. On the flip side, companies that specialise in alternative energy sources could find themselves in a better position.

The chief problem that the Democrats face is that even if they control Capitol Hill, they still hold no sway in the White House. The party can increase the pressure on the administration, offer increased scrutiny of policy initiatives and propose its own legislation, but the President retains the right to ignore it. Mr Bush has been able to work with a legislature controlled by his own party and has only used his veto once. By contrast, President Clinton had to work with a hostile Congress and used his veto 37 times, while Reagan refused to sign bills that emanated from Congress a staggering 78 times.

One of the Democrats’ priorities, for example, is to increase the minimum wage. Currently at $5.15 (£2.70) – in inflation-adjusted terms the lowest it has been for 40 years – party leaders have pledged to push for an increase to $7.25 within the first 100 days of any Democrat-controlled House, but success will depend on their ability to create a cross-party consensus – a tall order at a time when American politics is as divided as it ever has been.

However, with the House would come control of political debate and the power to block President Bush’s proposals. The resulting stalemate would likely lead to lower spending on projects like defence – which could hit companies such as BAE Systems – and on the contractors employed by the Pentagon.

Bush would also be hamstrung in his ability to push more tax cuts through Congress or make permanent the temporary measures he has imposed, suggesting there could be at least some improvement in the budget position.

Education companies such as Pearson could expect to benefit from a Democrat-dominated House although analysts believe it is unlikely the party would be able to pass any significant spending increases in this area.

Mr Morici also believes companies that have shifted operations overseas should be watching Tuesday’s result closely, with the Democrats likely to champion increased taxation on foreign income.

With the possible implications foremost in the mind of company executives, business is expected to have spent a record $2bn on political donations by the time the polls close in what will prove to be one of the most expensive campaigns ever. While the Republicans, as usual, have been the main beneficiary of this largesse, businesses have not been blind to the way the wind is blowing and have increased their donations to the Democrats.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/11/04/ccuselect04.xml