Perhaps the most counterintuitive result is that the GOP takeover makes it less likely that George Bush will wade into Iraq on his own, or with only British support. Not that a U.S. intervention there isn't all but certain. But with a much stronger stick to wave, against both Iraqi leader Saddam Hussein and such reluctant allies as France and Russia at the United Nations, Bush will have less need to speak loudly and act unilaterally.
Within the administration, the election results are a victory neither for Colin Powell and the negotiators, nor for Don Rumsfeld and the hawks. They are a victory for Bush's own preference to straddle those groups, avoid making commitments before he has to, and move decisively when necessary. He will have much less need to act as a "rhetorical president," as one presidential historian once complained about recent chief executives, and more ability to stand back and then act swiftly.
Two leaders who should have been watching, and apparently were, are North Korea's Kim Jong Il, and Israel's Ariel Sharon.
As the likelihood of a Bush sweep mounted in recent days, the former began to back off somewhat from his hard line regarding the North Korean nuclear program. Kim will continue to try to leverage his nuclear program for trade, aid, and other carrots, as he did in 1994. He won't have as strong a hand, however, against a refurbished Bush.
And in a few weeks, South Korea will have its own legislative and presidential election, providing a strong mandate for its leadership as well. In combination with the U.S. technology rally, and Federal Reserve interest rate cuts, the result should be a significant opportunity in Korean equities. For U.S. investors, such U.S.-listed stocks as the Korea Fund (KF) and index shares on the Korean market (EWY) are a buy.
Israeli equities, likewise, have rallied on the run-up to Bush victory, which strengthens Israel's ally in the White House, and the dissolving of the Israeli parliament by Prime Minister Ariel Sharon, with the consequent scheduling of elections for February. There are only two possibilities, either good for Sharon.
Possibility one is, the situation in Iraq will remain muddled, with the result that Israelis will certainly prefer to retain their hawkish prime minister at a time of uncertainty and danger. In that case, the Israeli labor party faces the same dilemma faced by Democrats in the United States some months ago: Advantage Sharon.
Possibility two, more likely, the United States will have led an international coalition of forces to remove Saddam and establish an emerging democracy in the heart of the Arab world. In that case, Israelis will feel safer, and there may be some inclination to act as Britons did in 1945, and remove a successful leader once the war is over. Don't count on it.
Either should be bullish for Israeli stocks, especially as Israel, like Korea, has a strong technology export sector. The country has a number of companies listed on the U.S. market, including internationally competitive software producers Formula Systems (FORTY) and a strong Internet sector. You can also simply invest in the First Israel Fund (ISL), a reasonably well managed if somewhat illiquid stock.
The even larger victors, however, are such countries as Singapore and Chile, who expect to complete shortly free trade deals with the United States in the style of the North American Free Trade Agreement. It's likely those deals would have been approved by a Democratic Senate as well, but only after much more haggling and pressure. But with either Chuck Hagel, R-Neb., or Richard Lugar, R-Ind., in charge at Senate Foreign Relations, the approval will be swift and sure.
Hagel would be especially bullish, not because of any flaw in Lugar, but because Hagel takes a greater interest in international economic policy, and is an emerging Republican statesman -- a potential secretary of State or even president, some years from now, who would signal the party's focus on the future. Either arrangement makes such U.S. listed firms as the Chile Fund (CH), Banco Santander (SAN), Singapore Fund (SGF), and the Singapore index shares (EWS) excellent opportunities.
Furthermore, such countries as Argentina, Bolivia, Peru, and most of southern Africa are in line for the next trade deals to come.
One country that may suffer in the short run is Brazil, which we listed as a buy two weeks ago prior to a significant rally. Brazil has already made it clear that it wants to play the role of France in the U.S. effort to build an American hemispheric equivalent to the European Union. This nay-sayer role will not stand it in good stead as it tries to earn debt relief from the U.S.-dominated International Monetary Fund.
If the Bush administration shakes up its own economic team, particularly in the key posts at Treasury dealing with the international lending institutions, Brazil may do just fine. But there will be bumps. In recent days, as the GOP tide swelled and Brazil rallied, the Democratic Century Fund took some profits from the Brazil position we recommended two weeks ago. In the meantime, there are better places to invest in the coming U.S. trade offensive in Latin America, such as Argentina's Siderca (SDT), Peruvian Copper (PCU), and Ghana's Ashanti Mines (ASL). The Ghana mines are also a play on gold, of course, a good hedge as the U.S. Fed battles deflation, and the international scene heats up with a likelihood of renewed terrorist strikes and war.
Another quick implication: With the rise of Nancy Pelosi, D-Calif., in the House leadership, mainland China's situation becomes more problematic. Pelosi is a longtime advocate of speaking out about human rights in China, and a skeptic of Western deals with its unreliable mandarin industrial complex. (Somehow, Western firms are beginning to observe, those deals with the Chinese often seem to be reneged on at the point of profitability.) Democrats will be looking for a place or two in the world to be more hawkish than the president, and given the ties of several leading Republicans to the regime, and China's role in supporting nuclear and missile proliferation in the world, Beijing will be one logical place to do it.
Add to this the corruption and confusion in the regime itself, a problem endemic to one-party states as an intelligent series in the Financial Times reported recently, and you have the recipe for a good short. Our fund is short several of the China telecoms and mining companies, and will expand that position if Democrats show any signs of making China an issue in the Congress.
The largest political winner among Democrats, of course, was former Vice President Al Gore. Many rank and file Democrats are kicking themselves now for not listening to Gore more closely this fall, when he laid out alternatives on both the war on terror and, to some extent, the economy. In the coming months, there will be a Democratic re-think, and a flurry of new proposals on economic and security policy as the party seeks to re-discover its own DNA.
As this suggests, Gore's rise, and the move of the Democratic Party to the left we can expect starting in January, is not necessarily bad for the Democrats, or Bush, or for the country. The decline of the me-too Democrats will make discussions a little more partisan, and bring on more than a few bitter filibusters as Senate Democrats exercise their last means of stopping certain GOP initiatives. Competition, however, in politics as in markets, is always good. With Gore, Pelosi, and others playing a larger role, there's a prospect of this in 2003.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, a hedge fund that invests in emerging market countries, and a former editorial writer for The Wall Street Journal. His firm may hold positions in some of the securities mentioned, and no decisions to buy or sell these or related securities should be made based on the advice or information in this feature; investors should consult with their own broker or other investment professional before making any decisions.)
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