Political calculus

Delving into political discussions should often be done with great caution. However, at this stage of the political cycle, it seems to be important for investors to pay attention to what's going on in Washington. While the general media has a tendency to highlight almost any political fight that may be going on, often those fights don’t have a large impact on the investing universe. However, increasingly the political world is melting into the financial world, resulting in a need for investors, especially those that make shorter-term, tactical moves, to have some understanding of what DC developments may affect various sectors.

For example, the financial sector continues to struggle to deal with the numerous new regulatory requirements that have been imposed on them over the past couple of years. Not only have the regulations put a dent in some of the more profitable operations at many of the larger investment banks, but financial institutions of all sizes have had to spend considerable time and money attempting to deal with the constantly changing regulatory environment. For us, the historical resilience of the financial industry means that maintaining our market perform rating for now seems to be the best course of action but we are closely watching developments in the space to see if more underperformance may be in the offing.

Turning to the health care sector, there is obviously a political element that needs to be accounted for when looking at potential performance. With the healthcare reform legislation still in a state of limbo, it's difficult to take a stand on one side or the other. While we like the healthcare sector for a lot of reasons, including attractive valuations, good yields, and solid balance sheets, we are hesitant to raise our rating to an outperform due to the possibility that the full reform package gets implemented, which, in our view, would be quite negative for the group. Conversely, we are reticent to move it to underperform as the chance that the package is ruled unconstitutional or is largely undone after the coming elections certainly exists, which in our view, would likely be a positive for the group. We’ve been burned by brief surges in the sector before, however, we are willing to be a little more patient here for now. Thus, we are maintaining our market perform view on the healthcare sector.

As we've noted many times, there is never a one-factor model when looking at the investment landscape and politics is certainly no different. We suggest investors pay attention to potential implications on investment decisions, but that they avoid placing too much emphasis on them as seems easy on issues that are often so emotionally charged.

As well as the above ratings, we continue to hold an outperform rating on industrials and information technology, and a market perform rating on consumer discretionary, energy, materials, and telecoms. Utilities and consumer staples remain at underperform.

Our recommendations can and do change quickly at times as we continually monitor economic progress and specific factors influencing individual sectors, so check back often.

Kully Samra is UK branch director at Charles Schwab