The US mid-term elections have seen a big protest against the incumbent Democrats and handed the Republicans more power. Should British investors be taking note?
What’s happened?
Yesterday, America voted in the mid-term elections. These are national elections held every two years. At stake was the entire House of Representatives (the ‘lower house’, elected for two year terms) and a third of the Senate (elected on a staggered basis for six years). The Republicans did noticeably well, extending their majority in the lower house.
However, the big story was the Senate, where they gained several seats, easily winning several Senate races that were expected to be close, and even winning some unexpected contests. Depending on the outcomes of the contests that are too close to call (including a run-off election in Louisiana) they will have between 52 and 55 senators, giving them a majority of the Senate for the first time since 2006.
This means that they now control both parts of Congress. They also won several key gubernatorial races, with controversial Wisconsin governor Scott Walker winning re-election.
Why does this matter?
Even before last night’s results, Republican control of the House already gave them the effective power to block legislation, although they aren’t able to override President Obama’s veto. This suggests that the gridlock that has characterised American politics for the past four years will continue, especially since the Republicans may feel emboldened by this demonstration of voter support.
Of course, it’s possible that Obama may use his executive power to bypass Congress entirely, for instance to allow some illegal immigrants to remain in the US, but Peter Orszag of Bloomberg View thinks that “anyone who expects a Senate shift to produce broad tax reform or immigration reform over the next two years is likely to be disappointed”.
That said, there may be some progress on trade, since Republicans are closer to the President’s views on this front. Indeed, Orszag thinks that granting the president increased trade-promoting powers and approving the Trans Pacific Partnership “could let Republicans demonstrate effectiveness on an issue that happens to split the Democrats”.
Are there any investment opportunities here?
At the margins, it may affect certain sectors, but overall, not really. Despite some of the breathless hyperbole emerging from the victorious side in the US, this isn’t a game-changer. This doesn’t “alter the economic landscape much” as Paul Dales of Capital Economics puts it.
While the Republicans like to call for spending and tax cuts, the risk of a backlash means they are “unlikely to refuse to raise the debt ceiling next year and trigger another Federal government shutdown”.
The victory of Republican candidates in local elections may be good news for energy companies, especially those engaged in hydraulic fracturing, or ‘fracking’. However, voters in Ohio, California and even Texas have approved local ballot measures that would restrict the practice – so the local politics are far more important than anything at a federal level.
Perhaps the biggest winners of the night were defence and aerospace companies who could benefit from a bigger Republican influence in budget negotiations.
What about the 2016 presidential election?
The mid-term elections are completely separate from the presidential election in 2016, so they will have no direct effect on that contest. That said, many experts think that the main factor behind the result was dissatisfaction with Obama.
The Telegraph’s Tim Stanley thinks the president “should take the lion’s share of the blame”, but also that the Republican party is “still in trouble… most of the elections it won were in traditionally red states and it still has a demographic problem that will make winning the White House difficult”.
Interestingly, The Times reports that while Democratic candidates were scrambling to dissociate themselves from the White House on the campaign trail, they are eager to appear with Hillary Clinton, who is expected to run for the presidency in two years’ time.