Investors sanguine about Democratic Congress

By Jennifer Coogan

NEW YORK (Reuters) - As the Democrats get set to take control of Congress in January, big money managers are taking the imminent power shift in stride, convinced that market-friendly policies of the Bush era will remain intact.

Money managers who participated in the Reuters Investment Outlook Summit in New York this week said it was unlikely that the new Congress would roll back the Bush administration's tax reform on dividend and capital gains income, a policy that has helped lift stocks.

One reason, they said, was that any rollback would prove politically unpopular for the new majority party.

"I don't expect as much in changed policies from Democrats. If you look at which candidates the Democrats ran to get the swing vote, they're liable to turn Republican if the party moves too far to the left," Reiner Triltsch, managing director at U.S. Trust, who forecasts international equities will outperform domestic stocks in 2007.

Bush's tax cuts capped the levy on capital gains and dividend income to 15 percent. The tax breaks are set to expire in 2010.

Reversing the reforms "is certainly a risk and would have a marginal effects on the market, but to be honest, I don't think the tax reform has had that much impact on market valuation levels," said Bob Morris, chief investment officer at Lord Abbett.

"I would worry about that, but let me ask, you want get re-elected in 2008, how many risks are you going to take with reversing tax policy?"

POTENTIAL MARKET GAINS

Morris, who sees the S&P 500 gaining 10 percent next year, is among several investors who see some positives for the market in the recent political shake-up.

Americans who have hesitated in investing amid the turmoil of the war in Iraq may become more inclined to add to their stock holdings if they see the government taking a fresh approach, he said.

"If we do something else and it generates even modest decompression, I think that could have a wonderful impact on equity valuations," Morris said.

Health care was one sector that came under scrutiny after the Democratic win as speculation swelled that the new Congress may try to let Medicare negotiate for lower drug prices, or the party might revive efforts to create universal health care.

"People probably put too much weight on the importance of politics to the market," Triltsch said. "I expected the health-care sector to get weak when the Democrats won the election, but it was largely a non-event."

Health care is the weakest performer out of the 10 S&P major industry groups so far this year, but most of its underperformance occurred in the first half of the year.

Indeed, some managers believe a Democratic-led Congress may actually give the beleaguered sector a boost.  Continued...