Investing through the US election

It’s a mug’s game to try to predict the outcome of a US election, suffice to say, that at the time of writing, conviction is building among pollsters and investors that Biden has a large enough lead to secure a victory.

In my view, the worst short-term outcome for investors would be the first disputed election result since the Supreme Court ruled in favour of George W. Bush in 2000; before that you have to go back to the Hayes/Tilden election of 1876. As Biden’s polling has improved, the risk of this worst-case scenario has declined, but volatility will remain elevated at least until the result is clear. In the short term, it’s difficult to position portfolios for elections, but analysing longer-term consequences is essential. The key areas to consider are economic policy, regulation, and foreign policy (in particular, global trade).The most important factor is whether we see a “blue sweep”, where the Democrats win the presidency, house, and senate: that would make radical action possible.

The trade implications of a Biden victory aren’t as clear cut as you might think. Tougher US policy towards China, particularly regarding intellectual property and the South China Sea, pre-dates the Trump administration. We can expect that the political risk premium of global trade tensions persists whatever the election outcome. In particular, if the US is successful in preventing China from accessing the intellectual property it needs to close the economic gap between it and the western world, this will slow potential GDP growth in China and have a knock-on effect across the region over the long term.

There are, however, several key differences that we anticipate. Firstly, under a Biden administration foreign policy is likely to be conducted behind the scenes: less public, less erratic. This reduces the headline risk we became used to in 2019 around global trade and should reduce market volatility as a result. This calmer approach will be felt across US overseas policy: the risk of an overreaction or misstep in relations with China will be lower. We are positive on equities in China and the wider region.

A Biden administration is also likely to build a closer relationship with the European Union: expect the US and EU to work more closely together, particularly with regard to Russia and the Middle East, even if concrete action is unlikely. The UK is likely to get less help from a Democrat US administration as it works through Brexit. US immigration policy under Biden is likely to be less restrictive, which would be positive for US GDP growth over the long term.

The second key difference a Biden presidency would bring is in regulation on technology, the environment and healthcare. All three are central issues to the left of the democratic party and were hotly debated through the primary debates earlier this year. The likelihood is, that in reality, a Biden administration will achieve far less than mooted – we’ve already seen some flip-flopping around policy intentions in the pre-election debates.

The economy will be in a fragile state as it recovers from this year’s recession, making it a difficult time to kill the geese that lay the golden eggs in the US economy. Any major changes are likely to be mired in legal resistance. We’re therefore tempted to disbelieve in radical change; but a Biden government would still bring different tone after Trump’s aggressive deregulation, and in particular there is room for greater taxation on big tech without stifling US dominance in that market. Even so, for now we retain our preference for higher quality US assets, including technology. In our view, the oligopolistic position many of these large companies enjoy is unlikely to change materially, and US growth is likely to lead the rest of the western world.

Finally, monetary and fiscal policy. We think some investors’ fears of a more radical direction in banking regulation, perhaps even Elizabeth Warren becoming Fed chair, are unfounded. Monetary policy is likely to continue in the same direction set by Yellen and Powell. The fiscal package being negotiated as we write is unlikely to reach the required cross-party agreement before the election, but it will probably follow, whoever wins. If we see a “blue sweep”, we can expect that package to be larger, more redistributive, and ultimately to have more of an inflationary impact. A combination of the Fed’s framework review and a blue sweep fiscal stimulus package could be the best chance of seeing inflation return to the US economy we have seen for decades, which would have profound consequences for investors: steeper yield curves, potentially higher interest rates, and better prospects for cyclical assets. However, this is for the future. For now, the world continues to battle the deflationary impact of the demand shock caused by the pandemic, but if a more inflationary environment arrived in the medium term the effect on portfolio positioning would be dramatic.

Talib Sheikh October 2020



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