01.05.2012
By Terry Flanagan

Political Portfolio

Anticipation over the 2012 election year and its affect on the markets may prove to be unwarranted, according to buy-side source.

The 2008 financial crisis called for the intervention of policy makers, and politics have been a large part of traders’ woes ever since.

This year has market participants buzzing with anticipation of even more market swings due to the upcoming 2012 presidential election. Yet, for Michael Lillard, chief investment officer of Prudential Fixed Income, the election will just mean more market status quo.

“The key issue is whether we get a mandate coming out of the election to reduce the national deficit. For that, you need all three branches of government to reduce fiscal headline risk in 2013,” Lillard said. “The odds of that coming together are low.”

Apart from alluding to more political dysfunction, Lillard also believes in the market-wide assertion that fixed income portfolio managers will continue to endure low interest rates and slow growth.

Perhaps one political agency whose help is most warranted is the Federal Reserve–which seems to be “on hold”, according to Lillard.

“It’s a reach for yield environment, and the Fed has been on hold for longer than they’ve indicated so far; that’ll keep money market rates at zero, GDP growth slow at 2%, and inflation low.” he noted.

Fixed income managers have opportunities to ax dead weight trades from their portfolios. Lillard cited a negative view on U.S. treasuries, and most other developed economies’ government debt due to high supply, but unattractive yield levels.

Instead, he identified “valuable” opportunities down the credit scale.

“Money center banks are improving in credit quality as they clear out prop traders, deleverage, create conservative balance sheets with raising a lot of cash—they’re well positioned for slow growth,” according to Lillard.

Thus, the 2012 election is merely adding onto pre-existing market conditions where “volatility is the only constant,” according to John Praveen, managing director in Prudential’s International Investments group. Market participants may not see as much movement as some are anticipating.

“There may be a brief rally after the election in regards to equity market swings,” Praveen said.

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