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Expectations on Obama's presidency are high

Practically the whole world is counting on AmericaÆs new president û who ran on a platform for change û to fix the economy.
Barack Obama has been sworn in as the 44th President of the United States. As he inherits a US economy that is reeling from the fallout from the credit crisis, expectations that his administration will steer the economy out of a recession are extremely high.

On the one hand, such optimism brings hope to fund managers and investors. But on the other hand, it brings the potential for huge disappointment.

Since the US elections in November and ObamaÆs historic victory, the US economy has plunged deeper towards a recession, more cash-strapped companies have required bailouts, more jobs have been cut, consumer confidence has dropped, and financial markets continue to remain extremely volatile.

ôThat we are in the midst of a crisis is now well understood,ö Obama said during his inauguration speech in Washington. ôOur economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost, jobs shed, businesses shuttered.ö

Obama went on to say that there is ôa nagging fear that America's decline is inevitable, and that the next generation must lower its sightsö.

Assuring his crowd of supporters, Obama said the challenges faced by the US economy will not be met easily or in a short span of time, but ôthey will be metö.

At the Asian Financial Forum in Hong Kong earlier this week, Stephen Roach, Hong Kong-based chairman of Morgan Stanley Asia, said he was encouraged by attempts by Obama and his administration to temper expectations.

ôI donÆt underestimate the problems that the US is facing, not just in its economy but in defending its role and reputation in the world. The president and his advisers are already hard at work in trying to temper expectations by saying that these problems are deep, they are formidable, they are likely to be lasting and donÆt expect a quick fix,ö Roach says. ôThat tells me of a leadership that is not going to go for a quick fix. But a leadership that is for once trying to do something strategic, maybe not even next year, to take action on savings, infrastructure, alternative energy technologies, and investing in human capital that could put America back in a sustainable course for the medium term.ö

There is a lot to be said about ObamaÆs eloquence and charisma and these could add to his ability to hold the country together, Roach notes.

ôObama gives the best speech of any politician I have heard in my lifetime as an American,ö Roach says. ôYou cannot underestimate the halo effect that leadership from the bully pulpit is able to impart. It is a powerful and a much-needed scarce commodity in the US and I suspect that if Obama continues to express his views and his passion and his vision in a judicious and strategic way then it may be that his honeymoon will last a little bit longer.ö

Whether ObamaÆs presidency is going to be bullish on the stock, bond or commodity markets, Roach says ôis the wrong way to assess what we are about to seeö.

Oliver Bolitho, Hong Kong-based head of Goldman Sachs Asset Management in Asia ex-Japan, notes that Obama has his work cut out for him.

ôThereÆs a mix in the markets today about this deleveraging and flight to risk and uncertainty about these interventions. If the consensus is correct then the next two quarters could be extremely difficult for the earnings cycle for corporates,ö says Bolitho. ôBut at some point there will be a tipping point in the confidence. For it to change, the leadership and the halo effect would be critically important. He has got to get it right. Policy is obviously at the forefront.ö

Indeed, ObamaÆs room to manoeuvre is limited. While the euphoria over his victory in the US presidential elections hasnÆt worn off, worries over how he and his administration will tackle the pressing financial and economic problems are growing.

ôBarack Obama has made no secret of his desire to prop up the US economy with a massive amount of government spending,ö says Andrew Liegel, London-based risk and regulation specialist at FRSGlobal, which provides global risk and regulatory compliance reporting solutions.

ôMany are wondering which industries will be the lucky recipients of government funds that strengthen research, product development, and hopefully, the balance sheets of their beleaguered private sector companies. Some have pointed to transportation infrastructure or environmental spending û but neither of these areas address the problems that sent AmericaÆs economy into a tailspin in the first place,ö Liegel adds.

A lot is riding on ObamaÆs stimulus package, says Joost van Leenders, an Amsterdam-based investment specialist at Fortis Investments.

Expected to cost around $775 billion, or 5.4% of GDP, the plan seeks to create three million new jobs. It offers tax cuts to individuals and tax incentives to businesses for new hires and investment. There is funding for strained state and local governments, while unemployment benefits and infrastructure spending are set to receive a boost.

ôOn the positive side, the tax cuts are permanent, which means it is more likely that money will be spent instead of saved. But these measures are spread out over two years, which means they should have a limited impact in 2009. In addition, the Obama plan is not big enough to lead to a quick recovery; it can only prevent a worse recession,ö says van Leenders.

Inevitably, van Leenders says, the plan should lead to a larger fiscal deficit. It is expected to top a record $1.19 trillion in 2009, dwarfing the 2008 shortfall û the highest on record û of around $455 billion.

ôThese campaign promises just reverse the underinvestment of recent years,ö says van Leenders. ôWhile this spending is needed, it definitely conflicts with his promise of long-term fiscal discipline. So far, Obama has been able to dodge criticism, explaining that deficit control remains a significant concern, but restoring the health of business and consumers is the priority.ö
¬ Haymarket Media Limited. All rights reserved.
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