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Federated Hermes' latest on the US Elections

5 November 2020

Eoin Murray, Head of Investment, at the international business of Federated Hermes

It seems likely that we end up with a Democrat in the White House, a Republican Senate and a Democrat House, which will lead to gridlock. This mix of leadership will be an adjustment following the red wave of the Trump administration and the blue wave of Obama, where all three were aligned. That being said, in terms of overall policy, this likely means that the US will get a much smaller fiscal stimulus, so monetary policy will need to continue to do the heavy lifting and the Fed will need to reiterate its ‘lower for longer’ rate policy.

Unfortunately, Biden will likely struggle to confirm his cabinet nominees, particularly in sensitive areas like finance, employment and environmental regulation – meaning it is highly probable that plans for substantial legislation on things like voting rights, healthcare and climate change will be stopped dead in their tracks.  In the very near term, I suspect that both sides will be lawyer-ing up, but this should only be a near-term distraction and ultimately come to nothing.

Yesterday we saw the US exit the Paris Climate Agreement, formally casting off the signature international commitment to cut carbon emissions and limit global warming. Biden however has stated his intentions of re-joining if elected, a move that would align with his climate agenda, the most ambitious of any presidential candidate in history.

Louise Dudley, Global Equities Portfolio Manager, at the international business of Federated Hermes

As hopes of the blue wave fade and a split of control seems likely, expectations have moved towards greater caution on the level of stimulus that can be agreed. With Congress controlling the money, the Presidential actions will be severely curbed. The tax hikes and the focus on tighter regulation will move down the agenda, offering a freer hand for those businesses that feel that a blue sweep would have hindered their ongoing market dominance. We see a positive tilt for cyclicals and value names. Sectors benefitting include financials, industrials and energy. The lean towards sentiment and growth is back in play.

Trump will continue to play the wild card. His actions will have a lasting impact, not least in the Supreme Court. He has forced a reset in politics which means that delivering progress for any leader is going to be an ever greater challenge. This may mean that businesses and investors get more of the same solid business environment, without the top down Twitter storms that markets have experienced over the last four years.

Over the last few months we have seen such extreme volatility in the market that today feels no different. What has come to pass is that the uncertainty may continue at least in the near term as an extended voting/counting period may stretch. The voting data is yet to be examined and no doubt there will be significant lessons learned on both sides once the underlying demographics of voters are analysed. Little uncertainty has been removed at present, other than perhaps the end is now in sight, though even the time horizon now seems to be indefinite.

We know that covid was one of the most cited voting issues. However, the economy is also a significant contributor to where peoples votes fall. We know the economic status of the US is above where we were in 2016, but could this have come more steadily? Where will the ongoing growth come from given there is little room for tax to move lower, particularly in light of the covid deficit contribution.

Once settled, the expectations of further fiscal stimulus agreement will drive a risk on trade, particularly in light of the weakness seen last week. Quite how much support is still to be determined but we expect the sectors benefitting the most are likely to be those that have already been the beneficiaries of such measures.

We continue to focus on quality characteristics alongside valuation, growth and momentum. This includes a focus on good or improving ESG characteristics which seek to identify solid companies which are well positioned for the future. The ability to time markets and styles is something that offers some upside in stable trending markets. While we continue to see the ongoing volatility in equity markets, remaining balanced in our exposure to themes and styles remains our favoured approach to delivering the consistency of outperformance.

Kunjal Gala, Lead Global Emerging Markets Portfolio Manager, at the international business of Federated Hermes

The US is heading towards a possible Biden Presidency, albeit without the Democratic clean sweep that most opinion polls were suggesting. This is likely to limit the scope of the fiscal stimulus which the market was hoping would boost growth and mitigate the economic damage from the coronavirus pandemic. Consequently, global growth is unlikely to accelerate meaningfully beyond 2021. A Biden Presidency is likely to be pragmatic with a focus on globalisation and hence positive for emerging markets. However, pressure on China is likely to be sustained as Biden could possibly unite with allies to counter China.

Regardless of the political outcome, we believe that the emerging market structural growth opportunity remains intact, driven by an aspiring, growing middle class, rising digitisation, reforms and infrastructure development. As industries consolidate following the economic damage from the coronavirus pandemic, companies with strong balance sheets and capabilities will benefit from these structural drivers. We retain our focus on long term structural themes such as 5G, digitisation, IoT, rising financial penetration, healthcare, premiumisation and infrastructure. We expect companies benefitting from these trends to outperform regardless of the ongoing political/economic uncertainty, weak commodity markets and potential credit quality issues.

Fraser Lundie, Head of Credit, at the international business of Federated Hermes

The Credit market reaction has been very positive, with the perception that a narrow Biden victory when combined with a Republican Senate brings a goldilocks outcome for spreads – or rather “gridilocks” as Biden delivers stimulus and more centrist politics including the stance toward international peers, while Senate acts as a hand brake on tax rises and regulation.

We view this picture and the market moves as being somewhat optimistic and we would highlight the risks of a second COVID wave in the US being met by more economically unfriendly restrictions by Biden – a possible catalyst to further downgrading of macro and earnings estimates into next year.

With larger stimulus packages likely to prove more difficult to pass, inflation expectations have rightly come down and this is likely to further support the demand for fixed income. However, this demand needs to be deployed with care.  Corporate fundamentals have already taken significant strain weathering the pandemic to date, and lower quality companies now have precious little in the way of room for error, and as such we are focusing our investments on stronger segments of the Credit spectrum.

Steve Auth, Chief Investment Officer Equities, Federated Hermes

As the pollsters scrape the eggs off their collective faces and the lawyers arm up, the one clear verdict coming from the elections is no one party won. The Blue Wave died on the shores of Maine, where Sen. Collins staged an unheard of comeback, and appears to have handily won. Though the presidential outcome remains unknown, pending counting and possibly litigating the mail-in ballots in Pennsylvania, however it is resolved, we are heading for divided government. In our view, this is a far happier outcome for markets than the prospect of a Blue Wave. We should still get a substantial fiscal package, but avoid growth-killing tax hikes planned by the Democrats in a sweep. This is supportive of our bullish market call for 2021, and our longer-term 5,000 target on the S&P 500 remains intact.

We anticipate the presidential race will take days, at least, to call, due to the late counting, even late arriving, mail-in ballots which now hold the key to either candidate receiving an Electoral College victory. Assuming most of the mail-ins are Biden votes, Biden would win. But it will hang on how many of these votes make it through the legal process. However, with the Senate apparently remaining in Republican hands, the presidential outcome becomes less key from a forward policy perspective, at least as far as the market is concerned.

The key risks for the market in the next few weeks come down to two, in our view. First, we could see a rise in civil unrest as the recount continues. Depending on how bad this gets, it could negatively impact economic forecasts for the economic revival. Second, the Covid resurgence we are seeing in Europe could start to pick up steam here as well. We see both these risks as real but short term.

Looking forward to the spring, Covid should be waning with the combination of improving treatments, the arrival of multiple vaccines, warmer weather, and fewer and fewer people left to infect. The economic revival already underway should be gaining steam with another fiscal stimulus deal likely and visibility on the election/forward tax environment encouraging an investment resurgence. Cyclical companies in particular will be lapping very weak or negative numbers, helping the cyclical side of the market which has been a key drag till now. The Fed will keep short rates pinned near zero, and with deficits likely to rise in a divided government scenario, the yield curve should steepen somewhat; more good news for financials, a big piece of the value trade, where stocks are cheap.

So while we had no clear political winner, we did have a winner: Mr. Market.

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