Prepare or predict? What investors need to know about the US election, October 2020

The US presidential election is just over two weeks away, and the outcome is still as unpredictable as 2020 has proven to be. So what should investors expect? While Trump can also be unpredictable, his style of Presidency is now well known, but what if Biden wins?

Will there be fireworks on 4th November?

“President Trump has already cast doubt over the reliability of postal votes. If the polls narrow further and Biden wins by a small margin, the result could be contested, which would be highly disruptive to markets and the US economy,” says Johanna Kyrklund, Chief Investment Officer, Schroders. “Longer-term, a close-run contest would likely have a muted impact on markets as the new president’s ability to significantly change policy direction would be limited.

“A Democratic sweep of Congress could have more profound consequences, since President Biden would have much freer rein. But although the market likes to focus on events like elections, political trends tend to play out over months and years. For example, should the Democrats complete a clean sweep, who is to say that regulation of Big Tech will be top of their agenda? There is likely to be other pressing matters to deal with and it could be some time until there is any negative impact.”

Sector considerations

We take a closer look at the impact of a Biden win on various areas:

1. Tax cuts/rises

While Trump cut corporate tax during his first term, Biden’s has proposed they are raised.  This could have a significant impact on company profits. But tax hikes and major changes to tax policy would only be possible if the Democrats take full control of Congress. They would not be considered as a stand-alone measure, but potentially as part of a comprehensive stimulus and social safety net bill.

Matthew Page, co-manager of Guinness Global Innovator fund, commented: “Tax concerns aren’t likely to be Biden’s number one priority though. That will be the economy and its restart after COVID-I9. Tough decisions will need to be made, but I doubt he’ll want to do anything to hinder the recovery. I think taxes will be more of an issue for 2022 or 2023.”

2. Trade Wars

China is one of the few issues that unites the Republicans and Democrats, but the tensions last year resulted in lower business confidence and economic damage. So Biden’s more multilateral approach to trade negotiations could provide support for emerging market assets in the scenario of a Democrat victory.

Matthew Page added: “China policy is a key issue. Tariffs have been a negative to S&P earnings and Biden’s more international/cooperative approach, could help profits."

3. Technology

The big tech companies are another area that unites both parties, but for different reasons. JP Morgan technology sector specialist, Kris Erickson, said: “Internet companies are under the microscope from both parties. Democrats have expressed concerns around the market power of large technology companies and are pushing for more action on curbing hate speech, while Republicans are most focused on bias in the way that information is presented.

Nick Ford, co-manager of LF Miton US Opportunities added: “If Biden wins, one of his proposals is to increase capital gains tax for the wealthiest investors. The effect could be to drive a wave of selling in November and December, with the hardest hit stocks those that have posted the biggest gains in recent years. Technology stocks would be particularly vulnerable because the strategy for many wealthy investors holding stocks with big gains will be to sell this year and pay the lower current tax rate on the gains instead of selling next year and be faced with a far higher bill.

4. Healthcare

“The US is our industry’s largest market, so the outcome of the presidential election is vital to the healthcare sector,” said Gareth Powell, co-manager of Polar Capital Healthcare Opportunities fund. “If Joe Biden wins, there are several points to consider. His initial healthcare strategy will likely expand the system currently in place, Obamacare, by a significant amount. This would be very bullish for the sector.

“Drug pricing in the US is an ongoing overhang where concerns rise and fall over any legislation that might affect it. Our view in the short term is this is not an issue that will be dealt with immediately. However, in the medium term, we definitely see action coming as the system in the US is simply too dysfunctional.

5. Utilities

The scenario of a Biden victory would accelerate a push away from fossil fuels towards renewable energy. Leslie Rich, sector analyst at JP Morgan, commented: “This could manifest itself in an extension of tax credits for wind, solar, and battery storage that could cause utilities to continue to retire coal plants and replace the capacity with cleaner sources. The Environmental Protection Agency may push for regulations that make fossil emissions more onerous and costly. Fossil infrastructure such as pipelines and LNG (liquefied natural gas) export facilities would also face greater hurdles.

So is the US still a good place to invest?

“Despite the ugly politics and the expectation of a contested election, we still believe the US should form the largest part of our portfolio, because that’s where the growth is,” concludes James Thomson, manager of Rathbone Global Opportunities fund.  “US companies have consistently grown profits more than four times faster than the rest of the developed world over the past 15 years.

“The upcoming US election will create volatility in the days ahead, but we can’t think of any outcome that would permanently impair the US outlook.  Overall, most investors are expecting the unexpected; disputed results, lawsuits and civil unrest cannot be taken off the table. Actually, I think the outlier event is a smooth vote, a clear result and a calm transfer of power. This would be good for all global stock markets, but it probably wouldn’t be the same stocks that outperform. We could see a pretty significant change in stock market leadership, perhaps continuing the hints of a change in trend that we saw over the last quarter.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and commentators and do not constitute financial advice.

Published on 19/10/2020