Currencies
A US$100 Billion Supra-Sovereign Wealth Fund?
February 08, 2008

By Stephen Jen | London

Summary and conclusions
The IMF has been asked by the G7 to come up with a set of best-practice guidelines for the sovereign wealth funds (SWFs).  The irony here is that we believe the IMF itself should invest its capital more like a SWF (and more like a central bank).  The IMF has one of the largest gold holdings in the world.  At today’s gold prices, the 103.4 million ounces of gold that the IMF holds is worth close to US$92 billion.  Arguably, this is a good time to convert its gold holdings into paper assets, for not only are gold prices high, but the IMF now also has a genuine need to generate investment income. 

Our argument
At the G7 meeting in September 2007, the IMF (International Monetary Fund) and the OECD (Organisation for Economic Cooperation and Development) were asked to come up with a set of best practices for the SWFs and the recipient countries, respectively.  These two institutions were chosen because of expertise in dealing with balance of payments (BoP) and exchange rate-related issues (in the case of the IMF) and institutional knowledge on foreign direct investment (FDI) (in the case of the OECD).   Being multilateral institutions, these two entities are thought to also have the credibility and (relative) political neutrality needed to render a set of guidelines on a controversial issue that a wide range of countries would accept.  The irony, however, is that the IMF itself has ample reasons to consider forming a SWF of its own.  It now has both the ability and possibly greater willingness to do so.  Such a fund could easily reach US$100 billion in size in the not-too-distant future.  Even if invested in the most traditional ‘safe’ assets held by the most conservative central banks, the annual investment returns could be substantial and could go a long way towards helping the IMF to be better equipped to face the new global environment. 

The case for the IMF having its own SWF
The IMF now has both the ability and possibly greater willingness to contemplate forming a SWF of its own. 

The IMF is more able to do so mainly because gold prices have more than tripled since 2002.  The IMF’s gold holding – at 103.4 million ounces – is only surpassed by the US (261.5m) and Germany (109.9m).   The sharp rise in gold prices in recent months has pushed up the value of one of the IMF’s assets from US$23 billion in 2002 to US$92 billion now.  This is arguably a good time for the IMF to consider selling its gold holdings. 

At the same time, the IMF is more willing to consider a different investment style.  The new Managing Director of the IMF, Mr Dominique Strauss-Kahn, announced on December 6 the need to rationalise the 64-year-old institution, including a drastic 15% cut in staff.  The main reason for this is that, with the balance of payments (BoP) outlook of the developing world being much better than at any time since WWII, the demand for IMF resources has dwindled.  For example, outstanding IMF credit to the world declined from an average of  US$30.6 billion during 1996-2000 to US$4.3 billion at end-2007 .  This decline in lending has translated into a sharp fall in the IMF’s operating income, compromising the ability of this institution to pay for its staff and to run the institution in general: the IMF’s annual operating costs were around US$715 million in 2007.  Further, the more modest revenue path has also restrained its ability to finance the HIPC (Highly Indebted Poor Countries) Initiative.  

In our view, the IMF possesses one of the most talented pools of economists in the world, produces top research on both developed and developing economies and still enjoys great credibility in the world.  While sensible rationalisation from time to time is always welcome and justified, the ability of the IMF to operate at its full potential should never be compromised, in our view.  Retrenching now is tantamount to downsizing a fire department when there is a low incidence of fire.  Further, downsizing now when the global economy is down-shifting and with new and daunting policy challenges (lingering inflation, financial regulation, cross-border investment, etc.) confronting both developed and developing countries means that the timing may not be ideal.  

Convert the IMF’s gold holdings into paper assets
We ran some simple back-of-the-envelope simulations to calculate the possible earnings streams if the IMF were to sell some or all of its gold holdings and invest the proceeds in bonds and equities.  

Scenario 1 shows how the 103.4 million ounces of gold, if completely sold now, would grow over time, assuming a conservative annual nominal investment return of 3.5%.  Scenario 2 assumes a 5.5% nominal return.  

Scenario 3 shows how this latter profile would be altered if the annual operating expenses of US$1 billion were taken out from the investment returns in 2008.  With the operating expenses assumed to rise at an inflation rate of 2.5% beyond 2008, this ‘supra-SWF’ could reach US$130 billion in 10 years’ time.  Spending out of this fund would strictly be limited to the investment returns, and the principal would be protected in nominal and/or real terms. 

The 3.5% nominal return is a most conservative assumption.  Depending on the IMF’s investment strategy, higher investment returns would, of course, be possible, even if investments were limited to AAA rated bonds.   Asking the Fund to hold equities may be unreasonable, given the associated market risk, liquidity concerns and reputational considerations.  But the point is that the IMF has a great deal of scope to enhance its investment returns without exposing itself to undue market risk.  Having most of the assets yielding no investment return does not seem to make a lot of sense.  Even if the IMF only sells off a portion of its gold holdings, it would be helpful, from a financial perspective.

Ultimately a political decision
The economic and financial argument in favour of the IMF altering its investment style seems compelling to us.  The key impediment to this proposal is mainly political.  The US government, in particular, will need to reconsider its thus far firm position on gold being a good, prudent asset for the IMF to hold.  But with the financial proposition being so different now than a decade ago, when the idea of gold sales to finance the HIPC Initiative was first proposed – and rejected, perhaps the IMF may be allowed to sell its gold holdings this time around.

Bottom line
‘SWFs’ are far from a four-letter word.  They are an inevitable and rational consequence of some of the most powerful structural trends in the global economy.  Demographics, excess savings and artificially depressed sovereign long-term interest rates are all factors that have altered the ability and the willingness of sovereign funds to modify their investment portfolios.  In this note, we argue that the IMF itself confronts similar pressures, and that, in our view, it should seriously contemplate setting up a supra-sovereign wealth fund, out of the gold holdings it has.  Fully financing the operating expenses of the IMF, this prospective fund could be launched at US$92 billion and grow to US$130 billion in 10 years’ time.

 

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Currencies
Delay in GCC’s Monetary Union Raises Reval Risk
February 08, 2008

By Stephen Jen | Aspen, Luca Bindelli & Charles St-Arnaud | London

Summary and conclusions
The planned monetary union of the GCC (Gulf Cooperation Council) in 2010 looks to be an increasingly ambitious goal.  There is a rising risk that it will either be delayed or that a few, but not all, of the six GCC member countries will start this union on time, and others will join when they are ready.  In this note, we take a first look at this important plan, and highlight some key peculiarities about this prospective monetary union.  A postponement of the launch of the monetary union could complicate the exchange rate policies of the GCC countries.  Specifically, the longer the delay, the more tempting/likely it will be for some small open economies in the GCC to contemplate one-off revaluations, while still maintaining the dollar pegs. 

Historical background of the single-currency idea
The GCC itself was established in May 1981 and consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.  As was the case with the EMU, this proposed monetary union is part of a comprehensive project to enhance economic and political integration of the member countries.  In November 1981, the leaders of the GCC signed the ‘Unified Economic Agreement’, which came into force in January 1982 and outlined the key objectives and measures of economic integration, replacing a web of bilateral arrangements.  A Free Trade Zone was established in 1983.  At the GCC Summit in Muscat in December 2001, the leaders of the GCC countries explicitly agreed on the planed formation of a monetary union by 2010 and, as an intermediate stage toward the monetary union, agreed to peg to the dollar by end-2002.  A Customs Union was finalised in January 2008.  The success of the EMU has certainly galvanised the GCC’s determination to form their own common currency area.  However, there are several issues that may delay the launch of this ambitious project.

Broad economic trends of the GCC
The GCC economies are rather unique.  We highlight some of their key traits here:

·  Modest economic size.  The total GDP of the six GCC countries is rather modest.  At US$790 billion in 2007, the GCC is a little more than half the size of Canada.  The total population of the GCC is 36 million, with Saudi Arabia accounting for 24 million of this total. 

·  Immense, but varied, oil and gas endowments.  The GCC countries collectively account for 40% of the world’s oil reserves and 23% of global natural gas reserves.  However, some countries are better endowed than others (more on this later). 

·  Exports to Asia; imports from the EU.  Roughly 37% of the GCC’s exports (mainly oil) go to Asia, while about 18% of imports come from the EU.  The US accounts for only 8.8% of the GCC’s exports and 11.4% of their imports. 

·  Low intra-regional trade.  While intra-GCC trade accounts for only 9% of total trade, excluding energy exports intra-regional trade is about one-third of the total. 

·  Developing financial markets.  In general, capital markets are becoming more developed.  Equity market capitalisation is around 128% of GDP, and bank loans are around 55% of GDP. 

·  Expatriate workers.  Though the population growth rate is high (3.2% per year in the past decade), the GCC is highly reliant on expatriate workers.  The share of nationals in total population is around 44% in the GCC, and 55% in the total labour force.  The public sector is dominated by nationals. 

Progress on convergence
While the GCC members have more natural (economic, social, language, historical and cultural) commonalities than the countries in the Euroland, there is relatively less convergence on economic measures.  We highlight several concerns: 

·         Concern 1.  Different endowments of natural resources.  Though it is well-known that, collectively, the GCC are well-endowed with natural resources, the amounts of these reserves are vastly different between countries.  Saudi Arabia accounts for more than half of the collective GCC oil reserves.  The UAE and Kuwait also have large oil reserves.  Qatar has the third-largest natural gas reserve in the world.  Bahrain and Oman, however, are less well-endowed.  In fact, at the current production level, and assuming no new discoveries, Bahrain’s oil and gas will be depleted in five years’ time.  Oman’s oil reserves could last ‘only’ until 2027.  Saudi Arabia’s oil may last another 70 years, while Kuwait and the UAE may last more than 100 years.   What this means is that a GCC monetary union may one day contain both oil exporters and non-energy exporters.  The desire to diversify out of energy, understandably, differs across the GCC, depending on the richness of the natural resource endowment.   

·         Concern 2.  Fiscal convergence will be difficult.  With  exports of energy being so dominant (energy exports account for an average of 80% of the total budget and a little more than 40% of overall GDP), swings in oil prices have had, and will continue to have, a major impact on the fiscal positions of these countries.  It will be difficult for the fiscal accounts to converge. 

·         Concern 3.  No more monetary convergence.  Until 2002, inflation across the GCC had been very stable, thanks to the currency pegs to the US dollar: from 1985 to 2005, inflation in the region averaged only 1.6%, with low variability.  However, in the past five years, inflation has accelerated and diverged across the region.  The average rate of inflation of the GCC has accelerated to 4.7% and Saudi Arabia has a reported inflation rate of 6.5%, while Qatar’s latest inflation print was 13.7%.  The fact that the world is less dominated by the US economy has rendered the dollar pegs a less perfect nominal anchor; the combination of high oil prices and a low fed funds rate has made it difficult for the GCC central banks to contain inflationary pressures.  In turn, inflation divergence has led to a divergence in the real exchange rates, and price competitiveness in the region.  This puts the monetary authorities in a difficult bind, as they confront the choice of letting their exchange rates appreciate in real terms through either nominal appreciation or inflation.  Either way, the monetary and exchange rate ‘glide paths’ toward the monetary union have gone off track, and the GCC members now need to think hard about their price competitiveness as they enter the monetary union.  The longer it takes to form a monetary union, the wider the window for policy interventions to adjust these glide paths.

·         Concern 4.  Low quality of macro data and a lack of transparency.  Originally, at the Muscat Summit in 2001, it was planned that the convergence criteria be defined by 2005.  However, not only has this not been done, but macro data in this region is also of relatively low quality – not conducive to facilitating close monitoring of the glide paths toward the monetary  For example, CPI inflation is available with a six-month lag in Kuwait, while Bahrain and UEA only have annual numbers.  In addition, the measures themselves are likely to be understatements of the reality.   

·         Concern 5.  Low degree of labour mobility within the region for the expatriate workers.  Though there is effective free movement of the nationals within the GCC, mobility is much lower for the expatriate workers.  One of the key requirements of an optimal currency area is free mobility of capital and labour, and the GCC has not satisfied this requirement yet. 

Currency implications
As we have argued in the past, the macroeconomic pressures impinging on the GCC are in some ways similar to those pressing on China.  In theory, the GCC should have their independent monetary policy, with a managed float exchange rate regime.  While it would, in theory, be better for the GCC to introduce major changes to their exchange rate and monetary regime after they have introduced a monetary union, based on our observations listed above, 2010 looks to be a rather ambitious target.  At the GCC Heads of State Summit in December 2007, the issue of whether to postpone the establishment of the monetary union was tabled for discussion, but no verdict was rendered.  Our best guess at this point is that the project will either have to be postponed to 2015 or that only a small subset of the six GCC members will form the initial common currency area, with the others joining in the future, when they are ready.  What this means is that the individual countries may have more leeway in devising their own policy paths in the meantime, i.e., it will no longer be essential that the GCC members move in sync and in a coordinated manner.  Modest step revaluations, while retaining dollar pegs, are indeed a possibility, particularly if the Fed continues to ease while oil prices don’t correct significantly.  The probability rises the longer the monetary union is postponed. 

Bottom line
Plans to establish a monetary union by 2010 seem ambitious to us, given the lack of economic convergence and other concerns.  While it would, in principle, be ideal to reform their exchange rate and monetary structures as a monetary union, the longer this union is delayed, the more tempted and likely some GCC members will be to contemplate making adjustments to their policy regimes.  Step revaluations, while still retaining the dollar pegs, will remain a risk, particularly for the small economies within the GCC.

 

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Bonds
Does the Treasury-Bund Spread Have the X-FAYRE Factor?
February 08, 2008

By Manoj Pradhan | London

The move in the yield spread between US 10-year Treasuries and Bunds has been one of the hallmarks of 2007.  The spread moved from 76bp to -28bp over 2007 — a huge 104bp — and currently stands at -32bp.  The dynamics are quite clear: US Treasuries and Bunds stood at 4.7% and 3.94%, respectively, at the beginning of 2007, while they are now at 3.6% and 3.94%.  A weakening US economy and the easing Fed were in sharp contrast to a robust Germany and hawkish ECB.  January was a mixed month, with the spread moving to a low of -55bp following the crisis in equity markets, but it has since widened to -32bp.  There has been a huge flight-to-liquidity element in the move in US Treasuries since July 2007, but fundamentals are flexing their considerable muscles slowly.  So what do fundamentals have to say about where the spread should be?  The answer comes from our new X-FAYRE model, a fundamental cross-rates model for 10-year yield spreads in the US, UK and Germany.  X-FAYRE says that the fair value of the Treasury-Bund spread at the end of January stood at -11bp.  The deviation of the spread from its fair value is giving us a strong signal that the spread should reverse its trend and widen towards its fair value.  The story seems to be driven primarily by US Treasuries, because the Treasury-Gilt spread is also outside a range justified by fundamentals, whereas the Gilt-Bund spread just seems to be moving away from fair value and needs monitoring. 

X-FAYRE
X-FAYRE produces a fundamental fair value for the spread between 10-year yields in the US, Germany and the UK.  The theoretical underpinnings derive from our fundamental model for the level of US 10-year Treasury yield levels (see Fairy Tales of the US Bond Market, Joachim Fels, Manoj Pradhan, July 26, 2006).  While X-FAYRE provides fair value for spreads, an implicit fair value for the level of Bund and Gilt yields can be pinned down using the fair value from the FAYRE model for the 10-year US Treasury yield.  The fundamental factors used to explain spreads are the country difference in real three-month LIBOR, trend inflation, inflation volatility and a variable that measures economy activity.  Consistent with the FAYRE model, economic activity is not important for Treasuries but does move Bund and Gilt yields.  The fair value estimates for the three spreads are determined collectively in a single econometric system with a sample period starting in 1995.  More details on the data, methodology and estimates are available in the Appendix of our full note.

Because of the interest in selling the US into Europe and because our model produces interesting results for this spread, we present the relationship between the spread and the fundamental factors here, deferring a similar exercise for the other two spreads to the Appendix.  The Treasury-Bund spread shows a stable long-run relationship with the real short-rate spread, the inflation trend spread and the inflation volatility spread.  Consistent with our FAYRE model, the spread does not have a consistent link with variables that portray the state of the US economy.  Bund yields, however, do respond to economic activity measured by the IFO.  According to our coefficients, the Treasury-Bund spread moves 28bp, 36bp and 29bp in response to a 100bp differential in the real three-month rate, trend inflation and inflation volatility.  A 1-point move in the IFO moves the spread by 2bp (by moving the Bund yield).  

Where is fair value?
The X-FAYRE model suggests that the rally in US Treasuries has pushed the Treasury yield further out relative to Bund and Gilts than fundamentals would justify.  The move in 10-year yields has outstripped the move in fair value for the spread.  A sharp drop in US three-month LIBOR and the inflation trend relative to Germany and the UK have recently driven fair value itself lower.  In addition, robust economic activity in the US has kept the IFO and the CBI index at elevated levels, keeping Bund and Gilt yields higher relative to Treasury yields.  The fundamental view is backed up by relative value analysis, which shows that US Treasuries are rich relative to Bunds and Gilts on a 360-day statistical basis (see The FITness Report, January 29, 2008).  

In sync with our strategists.  Results from X-FAYRE find plenty of support from our interest rate strategists, who also expect the Treasury-Bund spread to reverse direction in 2008.  They expect that real bonds in the US will underperform Europe, pointing out that the pick-up from US real yields to European real yields is at its historical high (see A New Tomorrow, Jim Caron, Laurence Mutkin, January 31, 2008).  In particular, our US inflation strategist suggests that the five-year real yield point could be an interesting way to play this trade on a relative valuation basis (see Let’s Get Real Together, George Goncalves, February 5, 2008).  The team also expects US breakevens to widen relative to European breakevens.  Both trends will widen the nominal spread — consistent with the results of the X-FAYRE model.   

What explains deviation from fair value?  Most of the deviation from fundamentals is probably attributable to flight to safety and sentiment.  Evidence regarding the flight-to-safety bid comes from implied volatility metrics.  That 10-year yields fell when the MOVE Index (an index of implied volatility across the US Treasury curve) spiked upward suggests that a flight-to-quality bid of reasonable size must be in the price.  Further, our interest rate strategists have noted that US interest rate volatility has been consistently higher than that in the euro area and UK, suggesting that US yields would have to be relatively higher on this basis were it not for the flight-to-quality bid (see the Global 2008 Outlook from our interest rate strategy team). 

The outlook for money markets suggests a dwindling flight-to-liquidity bid and a return to fundamentals.   There have been encouraging trends in the commercial paper market in terms of spreads and outstanding (see the daily Money Market Update series by Laurence Mutkin and Rav Singh), while LIBOR has behaved much better in terms of spread and volatility.  The results of the last TAF auction suggest that central banks may have begun to turn the tide — barring any new shocks, of course.  Finally, central banks have demonstrated via repeated and coordinated action that they stand ready to supply additional liquidity should problems in the money markets persist or worsen.  In summary, technical forces point to bearish moves in 10-year US Treasuries, while fundamentals point to a wider US-Germany spread.  

Is fair value itself likely to move?  Among the variables in the model, only the dependent variable — 10-year spreads — and LIBOR rates are forward-looking, high-frequency variables in this setup.  At this time, the economic outlook is most bearish for the US and most stable for the euro area.  This is priced in to markets and long-term rates so that the potential for rates to move higher is biggest in the US and downside risks to long-term rates are highest in the euro area.  Thus, the risks to movements in fair value are likely to be supportive for the Treasury-Bund spread to move towards positive territory.

Where would fundamentals have to be for the spread to be at fair value?  Our model suggests that — if all other things stay as they are — three-month LIBOR, the inflation trend and inflation volatility in the US would have to be about 100bp, 77bp and 95bp lower than the respective levels for Germany.  Perhaps placing the burden of explaining the spread through a solitary factor seems unreasonable.  However, even a combination of moves seems difficult to engineer without a further move in spreads.  For example, the actual spread would be at fair value if the three-month LIBOR, inflation trend and inflation volatility were 40bp, 20bp and 30bp lower in the US, keeping in mind that actual inflation would have to fall by more to induce a 20bp move in the trend. 

The outlook for fundamentals.  Our US economics team expects the fed funds rate to trough at 2.5% and help relegate the recession to a shallow one in the first half of this year.  The aggressive rate cuts by the Fed, in turn, have pushed inflation expectations higher.  An expected recovery in the second half of the year, rising inflation expectations and rising risk premiums should all contribute to rising yields.  Risks to euro area rates and economic conditions are to the downside since a reaction to US economic conditions and events can hardly be deemed unexpected.  In the meantime, corporate Europe steams ahead and the ECB has stayed hawkish.  The outlook in the UK, and therefore for policy rates, is mixed, with downside risks to the economy balanced by higher inflation.

What are the risks to this view on the spread and on fundamentals?  The biggest risk remains that of further downside to US growth.  The future of the monolines, earnings concerns on the equity side and conditions in money markets could all hamper widening.  The biggest risk outside the US is that of decoupling.  If the euro area and the UK effectively remain immune to the US recession, the bond yield spread to Treasuries may continue to reflect higher risks in the financial markets and downside risk to fundamentals in the US.

 

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United States
Business Conditions: Not a Recovery Yet
February 08, 2008

By Shital Patel and Richard Berner | New York

The Morgan Stanley Business Conditions Index hit a 4-month high in early February, increasing seven points to 36% on a seasonally adjusted basis.  Unadjusted, the MSBCI jumped 17 points to 43% with nearly a quarter of respondents noting improvement in their industries, up from 3% in January.  But credit restraint — the key driver of the downturn — showed virtually no improvement from last month.  Three-quarters of lenders continue to tighten standards while half of the borrowers are facing tighter standards.  Our credit conditions index, which looks at the ability to get financing compared to three months ago, edged up five points to a still-weak 33% in February.

The uptick in assessment of business conditions may be the result of several recent events.  First, the broad acceptance of an economic growth slowdown has reduced some of the uncertainty surrounding the outlook and lowered the bar for improvement.  Second, to help an ailing economy, the Fed has eased more aggressively than we expected even a month ago.  Since the January survey, the Fed has cut the Fed funds target rate by 125 basis points and we now expect a trough of 2.50% versus 3.50% previously.  Third, the fiscal stimulus package — including tax rebates and business investment incentives — which was just enacted by Congress may have boosted confidence that the downturn will be short and shallow.

As we’ve noted in the past, one month’s improvement in the MSBCI is essentially noise, and not a signal of improvement.  Even though the index improved seven points, the index is still below average by more than one standard deviation.  Forward-looking survey details improved but remained at weak levels.  The business conditions expectations index increased eight points to 33% while the advance bookings index posted a gain of seven points to 50%.  Hiring plans remained weak, with only 24% of the groups planning to increase payrolls over the next three months and 26% planning to cut payrolls.  As we expected, January’s surprising jump in plans to increase capital spending over the next three months proved unsustainable; they plunged by 16 points to 45%.  The pricing conditions index also fell six points, off the two-year high of 71%.  That could be a harbinger of eroding pricing power.

Meanwhile, other surveys of business activity have been getting a lot of media attention.  The typically non-market moving non-manufacturing ISM index sent stocks falling and Treasuries rallying after its stunning 8.6 point plunge to 44.6.  This came in sharp contrast to the surprising 2.3 point increase in the manufacturing ISM measure.  Over the past year, our own manufacturing and services sub-indexes have moved in tandem although the manufacturing measure has been consistently higher.  Other measures including the NFIB small business optimism index and the Conference Board’s CEO Confidence measure have hit multi-year lows.  CEOs’ expectations for their own industries were also weak, with only 17% expecting improvement over the next six months, according to the Conference Board.

Even the most cursory internet search of the word “recession” pulls up over 66,000 news articles.  However, according to estimates prepared by US equity strategist Bill Smith, MS analysts are slow to fold in the impending recession in their earnings estimates, although they are still ahead of Street analysts.  MS bottom-up earnings growth estimates for 2008 have come down from 13.5% in early January to a still-lofty 9.8%, mostly due to a large downward revision to financials estimates.  Bottom-up consensus estimates have remained high at 13.0%.  Consequently, we and our strategy team believe that analysts will be reducing their earnings estimates.  Our own forecast for 2008 after-tax “book” profits growth is down 5.2%.

Analysts do seem forthright about the risks: Risks to earnings estimates remained roughly unchanged from last month, with nearly 70% of analysts continuing to expect downside risks to their estimates.  Of these, 52% believe the risk is from worse domestic results, 28% from worse domestic and foreign growth, 14% from margin compression, and 10% from worse than expected growth abroad.  Only 31% of analysts see upside risks to earnings estimates.  The margin outlook remained virtually unchanged this month, with 38% of analysts expecting margins to expand in 2008 at companies under their coverage.  We have long noted that the dollar would have a lagged impact on earnings.  This month, over half of the analysts reported that the dollar has contributed to bottom line results.  40% believe the weaker dollar has contributed 1-3 percentage points while 12% believe the depreciation has contributed 3 percentage points or more. 

Special survey questions also reveal that the election outcome and its potential implications for investors are not yet a concern.  We asked analysts whether companies under their coverage are changing their dividend policy or capital structure in anticipation of a change in dividend or capital gains taxation (e.g., offering a one-time dividend now, or emphasizing buybacks over dividends).  Surprisingly, only two analysts reported that companies are reacting to possible changes in tax policy.  Furthermore, neither CFOs nor investors seem to care about the impact of any potential changes.  A full 86% of respondents noted that neither groups have been asking questions about the impact of tax policy changes.  According to US strategists Abhijit Chakrabortti and Nicole Davison Fox, key election year issues with market implications also include healthcare reform and clean energy. 

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