INVESTMENT NOTE

2012 31 AUGUST

Romney vs Obama

Implications of the upcoming presidential elections to the US economy and

investment market

Another interesting earnings season is coming to a close with 98% of companies having reported. The main

theme emanating from the second quarter earnings season was that sales and earnings growth is slowing

materially compared to first quarter. Aggregate sales growth was a weak 0.60% while earnings grew at an

unflattering -0.01%; much weaker when compared to last quarter which saw sales growth of 5.80% and

earnings growth of 6.45%. Current analyst estimates of earnings growth for 2013 of roughly 12% appear to

be ambitious given the lower guidance provided by many companies this quarter.

On the macro economic landscape, global growth as well, has been slowing. The chart below illustrates that

many developed and developing countries are experiencing slowing economies. Recent global PMI

(purchasing managers index) data also confirms weakness in the macro environment. Although recent

housing data from the United States has been encouraging and US labour growth appears to have bottomed,

the health of the global economy runs contrary to recent equity market performance.

The S&P 500 Index has rallied close to 12% year to date and 2.50% in August. It is a surprising turn of event

(albeit a positive one) that the markets have rallied given the earnings and global economic picture just

described. While the specific effects, positive or negative, of quantitative easing by central banks on their

respective economies are up for debate, programs of QE appear to have supported a rally in risky assets.

The question is how much any further quantitative easing will aid the markets, and how much has already

been priced in. Given the strength of the S&P 500 Index in light of earnings and economic weakness, one

can presume some factor for the possibility of QE3 has already been priced. While the potential for weaker

INVESTMENT NOTE

2012 31 AUGUST

earnings exists going forward, we expect that QE3 may extend the rally at the margin, however exhaustion

may also be beginning to set in on investors’ opinion of the effectiveness of further action.

With the selection of Paul Ryan (R) of Wisconsin as Mitt Romney’s running mate in the upcoming U.S.

Presidential election, a clear message was sent by the Romney camp. Their solution for a weak economy is

in part smaller government, responsible budget spending and lower taxes for corporations and households.

Although the Romney camp may allude to President Obama’s administration as free spending liberals, the

chart below shows that government spending as a percentage of GDP has been falling. The concern is what

effect could a potential change in philosophy, in terms of spending, have on an already weak economy. Is

now the time to materially decrease spending? Government spending has been the crutch for the economy

as consumers went through a period of deleveraging while at the same time corporations have been unwilling

to use the record amounts of cash on their balance sheets.

Source: Bloomberg, Economic Insight

Starting in the New Year, the Bush Tax Cuts expire, the Temporary Payroll Tax ends and the automatic

sequesters set in. As a result, the US budget deficit is set to shrink from US$1.1 trillion to US$641 billion or

from 7.3% of GDP to 4.0% of GDP. Estimates are that the economy may shrink by 2.9% in the first half of

2013 with growth resuming to a mere 1.9% for the second half of the year. If the proposed cuts occur in their

entirety, they, coupled with a slowing economy and continued headline risk from Europe, provide a very

uninspiring environment for 2013. That being said, politicians across the world have illustrated their ability to

deviate from their original policies. The makeup of Congress and the Senate will help investors determine

which policies are likely going forward.

More to the question of Obama or Romney, and who are investors voting for in the upcoming election. The

potential effectiveness of either President Obama or Mitt Romney’s fiscal policies can be debated but their

views on monetary policy are more certain. Mitt Romney recently stated that he would not renew Federal

Reserve Chairman Ben Bernanke’s position, a clear signal of "if I win, Ben’s out". This was an interesting

move, potentially complicating Bernanke’s willingness to act in upcoming Fed meetings. Ben Bernanke has

always been cognizant of the reputation of the bank independence among investors and the public. If he

INVESTMENT NOTE

2012 31 AUGUST

were to implement another round of quantitative easing, might it appear biased in light of economic data that

is neither overly positive nor overly negative?

Time will tell how the markets would react should Romney win and fulfill his promise to remove Bernanke from

his current post. The market is familiar with the current Fed Chairman and his policies. As chairman,

Bernanke with the help of the Treasury was able to navigate a US financial system from the brink of collapse.

And his quantitative easing policies have been beneficial for risky assets. If Mitt Romney were to be elected,

who would he replace Ben with? What would be the new chairman’s view towards policy? Will he be as

accommodative as Helicopter Ben has been thus far? Unfortunately for investors, current campaign policies

pose more questions than they answer; and we are well aware of how the market treats uncertainty.

Philip Petursson

Managing Director, Portfolio Advisory Group

Manulife Asset Management

Manulife Asset Management is the asset management division of Manulife Financial. Manulife Asset Management’s diversified group of companies and

affiliates provide comprehensive asset management solutions for institutional investors, investment funds and individuals in key markets around the world.

This investment expertise extends across a full range of asset classes including equity, fixed income and alternative investments such as oil & gas, real

estate, timber, farmland, as well as asset allocation strategies. Manulife Asset Management has investment offices in the United States, Canada, the United

Kingdom, Japan, Hong Kong, and throughout Asia. Additional information about Manulife Asset Management may be found at www.manulifeam.com.

Manulife Asset Management, Manulife and the block design are trademarks of The Manufacturers Life Insurance Company and are used by it and its

affiliates including Manulife Financial Corporation.

This material, intended for the exclusive use by the recipients who are allowable to receive this document under the applicable laws and regulations of the relevant jurisdictions, was produced by and the opinions expressed are those of Manulife Asset Management as of the date of writing and are subject to change. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Asset Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Information about the portfolio’s holdings, asset allocation, or country diversification is historical and is not an indication of future portfolio composition, which will vary. Neither Manulife Asset Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline or other expectations, and is only as current as of the date indicated. There is no assurance that such events will occur, and may be significantly different than that shown here. The information in this material including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. This material was prepared solely for informational purposes and does not constitute a recommendation, professional advice, an offer, solicitation or an invitation by or on behalf of Manulife Asset Management to any person to buy or sell any security.

This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. Past performance is not an indication of future results.

Proprietary and Confidential Information – Please note that this material must not be wholly or partially reproduced, distributed, circulated, disseminated, published or disclosed, in any form and for any purpose, to any third party without prior approval from Manulife Asset Management.

This material has not been reviewed by the Securities and Futures Commission (SFC).

Presented by Manulife Asset Management (Asia), a division of Manulife Asset Management (Hong Kong) Limited.