Three scenarios for the outcome of the US election
In the US, 3 November 2020 will be election day. Investors should prepare for volatile market phases. Which asset classes, sectors and companies will benefit from which election outcome? This question is not easy to answer, but some initial reliable hypotheses can be derived from the parties’ election manifestos. Key economic policy areas such as taxes, trade, infrastructure, wages and regulation will be affected in very different ways, depending on which party forms the next federal government. The election outcome could have significant implications for investment. A combination of strategic research and bottom-up analysis will be highly effective in this context.
The election result might be contested
According to our experts, there are three realistic outcome scenarios for this election. The Democratic challenger Joe Biden is currently ahead of the incumbent Donald Trump in polls and forecasts (e.g. FiveThirtyEight). But Biden is by no means sure to win. In the event of a close outcome, there is also a short-term risk of the result being contested. US President Donald Trump has repeatedly called into question the legitimacy of an election that is expected to see a high proportion of postal votes due to the coronavirus pandemic.
Joe Biden is the clear frontrunner, but uncertainty remains high
But what do the election manifestos tell us about the policy agenda? Surprisingly, it turns out that there are some remarkable areas of overlap. In terms of economic policy, both candidates have a clear focus on US interests. This means that regardless of who the next president of the United States is, the tone of US trade and technology policy towards China is unlikely to change fundamentally. However, Biden would probably take a more conciliatory and moderate approach. The implementation of the election manifestos will also be influenced by the electoral arithmetic in the US Congress. Whether a president governs with a majority in both or only one of the chambers of Congress has a huge impact on the government’s scope for action.
Scenario 1: Biden wins with a Democratic majority in both chambers (‘Democratic sweep’)
Some parliamentary seats will also be contested on 3 November. This means that the Democrats could conceivably not only have their candidate elected as the next president but also win a congressional majority (‘Democratic sweep’). The Democratic majority in the House of Representatives currently seems well established. A Democratic majority in the Senate could probably be achieved only in conjunction with the victory of Joe Biden in the presidential election. Voters in the small number of fiercely contested swing states would be relatively unlikely to vote for the presidential candidate of one party and, at the same time, for the Senate candidate of the other.
Equities: correction as an opportunity to buy. A common concern is that Biden’s victory would adversely affect the earnings power of ‘corporate America’. This concern is not entirely unfounded. The Democratic election manifesto does deal a blow to US companies in some regards. On the other hand, it also includes plans for a very comprehensive and innovation-focused investment package worth around US$ 2.4 trillion. The immediate equity market response to a Biden victory and a Democratic sweep would probably be negative. But in the long term, the market could benefit from the increased potential for growth in the US economy and wage increases that should boost consumer spending. Furthermore, the trade rhetoric would probably be less harsh under a President Biden and US foreign policy would take a more diplomatic approach. In summary, an equity market correction in response to Biden’s victory could present an opportunity to buy.
Sectors: ESG set to benefit. The Democrats are planning to introduce stricter environmental, health and social standards, for example in the financial and energy sectors. This would probably put pressure on equities from these sectors. Shares of companies with a high proportion of labour costs and limited pricing power (hotel chains, restaurants, cafés, bars, retail) would also likely be adversely affected. On the other hand, companies in industries such as renewable energies, green tech and infrastructure and companies with high ESG ratings (ESG = environmental, social and corporate governance) would enjoy a tailwind. Companies with a low proportion of labour costs and significant pricing power (many multinationals) could benefit as well.
Government bonds/US dollar: moderately weaker. US Treasuries would initially be under moderate pressure due to reduced uncertainty (in connection with trade) and the less confrontational rhetoric that Biden is expected to bring to the presidency. Increased fiscal spending and the potential inflationary effect of rising wages and stronger aggregate demand are also typically unfavourable for US government bonds. Higher government bond yields would support the US dollar and counteract the downward pressure resulting from the general easing of diplomatic tensions and reduced uncertainty in connection with the trade dispute.
Scenario 2: Biden wins the presidency but not a congressional majority (‘Biden split’)
Similar to Donald Trump, President Biden’s main tool in this scenario would be executive orders, because the Republican majority in the Senate would be highly likely to block all of his legislative initiatives. As taxation and spending decisions have to be approved by Congress, most of his investment programmes would probably not come to pass and his economic policy agenda would be less likely to generate the desired stimulus for growth. He may be able to get a majority behind a pared-down infrastructure package, but the focus would probably shift from a ‘green deal’ and technologies of the future to a more traditional ‘roads and bridges’ programme. The foreign policy arena would see the same shift towards greater cooperation with allied nations and less confrontational rhetoric.
Equities: stable Environment. In this difficult economic climate, the extent to which a President Biden is able to minimise tax increases would determine the scale of the uplift for share prices as a result of his dialling down the trade rhetoric. All in all, this scenario would probably be the most favourable for the equity market.
Sectors: moderate risks. There is likely to be little movement in terms of legislation. The area in which Biden would have the most scope for action is regulation (stricter environmental standards, tighter regulation of the pharmaceutical and healthcare sectors, limitation of the market power of big tech companies, greater focus on financial market regulation). This would probably put selective pressure on equities from these sectors.
Government bonds/US dollar: signs of weakness. In this scenario, we would anticipate moderate pressure on prices of US Treasuries as a result of the reduction in trade-related uncertainty and potential inflationary effects of regulatory changes. Weak economic growth would moreover result in a lack of budgetary consolidation in the medium term. These circumstances also tend to go hand in hand with a weaker US dollar.
Scenario 3: Trump is re-elected with a majority in the Senate only (‘Trump split’)
The current congressional split continues. A smaller infrastructure package with a focus on traditional industries and tax cuts for middle-income households appear possible, in exchange for extending the tax relief for private households, which is about to expire. Deregulation of the energy and financial sectors would continue. At a global level, uncertainty would persist and the dispute with China would be likely to escalate further, especially on the subject of technology.
Equities: widening spreads. There might be a brief rally triggered by relief that tax increases and tighter regulation have been averted. In the medium and long term, spreads on risk assets are likely to rise due to a lack of modernisation in the economy and weak economic growth. In addition, Trump’s foreign policy would probably become even more unpredictable given that he no longer needs to worry about re-election.
Sectors: laissez-faire. Trump represents a laissez-faire approach to economic policy. His second term in office would probably see greater deregulation, for example of the energy and financial sectors, and attempts to relax environmental standards to support the ailing US steel industry (the ‘rust belt’). However, this would not resolve existing structural problems. Unlike under a Biden administration, there would be little fresh stimulus for equities in the green tech and renewable energy sectors.
Government bonds/US dollar: Consolidation of public spending is not expected. As safe havens, US government bonds might benefit in the short term. But in the longer term, meagre growth and a lack of budgetary consolidation would most likely weigh on US paper. In our view, the US dollar could face risks in the medium term as greater uncertainty and the undermining of public institutions could erode the status of the US as a destination for investment.
Trump or Biden? The US presidential election has a significant influence on prices in the world’s biggest capital market. Winners and losers at sector level will differ depending on the outcome of the election. Democratic challenger Joe Biden is currently ahead in the polls, but his victory is by no means certain. It is therefore sensible to conduct a scenario analysis. In the immediate aftermath of a Biden victory, share prices could come under pressure because the Democratic candidate is associated with tax increases. But regardless of whether Biden or Trump is elected, the US will maintain its tough stance on trade and technology policy towards China. Swift budgetary consolidation seems unlikely in any case.
Terms of office of US presidents and equity market performance
However, all in all, Biden’s agenda appears to offer more on the upside. His trade rhetoric and foreign policy should be more moderate than Trump’s, who – in turn – would be free to act without concerns about re-election in his second term. Biden’s proposals on infrastructure spending and wages are growth-boosting measures, while Trump’s plans for the economy are more focused on preservation. A historical comparison shows that the median equity market performance has been stronger under Democratic US presidents than under Republicans (see chart), although it must be stressed that share price performance is influenced by a multitude of factors. But it shows that the widespread concern among equity investors about Democratic US presidents may well be exaggerated.
As at 24 August 2020