Senior members of our investment teams in London and Pittsburgh share their views ahead of the US Election.
Eoin Murray, Head of Investment, at the international business of Federated Hermes
Biden has put forth the most ambitious climate plan of any presidential candidate in history—promising, among other things, to get the country to 100% clean electricity generation by 2035 and to invest $400 billion in clean energy innovation and technology over 10 years. President Donald Trump, by contrast, mocked global-warming fears while rolling back climate regulations imposed by his predecessor, arguing they were harmful for the economy. But the Republican position runs deeper than that, with the party inching over decades from denying the existence of climate change, to saying it was part of a natural cycle, to dismissing it as unstoppable to considering modest policy responses. House Republicans have even introduced a package of climate change legislation that would fund the capture and storage of CO2 emissions from fossil fuels; research new ways to use and commercialize the captured carbon; and conserve the environment by planting trees.
Whilst supportive of Biden’s vision, some of the climate faction that inputted to Biden’s climate response, want to see the country move more quickly toward renewables (the ‘E’), while others think it’s more important to conserve and create jobs (the ‘S’), and still others are more concerned with political feasibility than anything else (a loose ‘G’). Biden’s record under the Obama administration is also a concern, however environmental justice advocates consider the choice of Kamala Harris as Biden’s running mate to be a big win, as her credentials on this issue go way back to her days as the San Francisco DA, when she opened the office’s first environmental crimes division. Implementation of their respective visions may therefore be more tortuous than either candidate would care to choose.
Big Tech is another issue where policies and desired outcomes are more nuanced than they look on the surface. The House of Representatives anti-trust report in October contained some serious allegations. In many ways, the report was reminiscent of the anti-trust moves against Microsoft some two decades ago, that didn’t come to much in terms of regulatory-driven change but acted as a dampener on Microsoft’s stock performance for a long period of time. Does it reflect a Biden agenda for what will happen in his opening term? Equally, President Trump has not been slow to recognise the burgeoning power of social media and has courted the emperor founders (albeit with mixed success). Collectively FAMAG today account for almost 23% of the S&P 500 and have been a source of major support for the market as a whole, so this is a big deal.
It is rumoured that the Justice Department under AG Willian Barr is preparing to file an anti-trust case against Google in the near term. This case could yet give Trump and Barr an election-season achievement during the final run up on an issue that both Democrats and Republicans see as a major problem: the influence of the biggest tech companies over consumers and the possibility that their business practices have stifled new competitors and hobbled legacy industries like telecom and media. Meanwhile, members of the House anti-trust committee have been pondering possible responses, all of which would serve to bring the US closer to Europe’s approach and present not insignificant risks to US big tech.
Fraser Lundie, Head of Credit, at the international business of Federated Hermes
The outcome of the US election may have broad reaching implications for a number of areas of fixed income. We have focused our attention on issues where Trump and Biden have conflicting positions – taxes, healthcare, energy and relations with China – and what the impacts could be for the economy and credit markets.
A Trump win, while unlikely, would at least be a known quantity and therefore more of the same – low taxes, deregulation, aggressive and unpredictable foreign policy (particularly related to China), and significantly more support for the oil and gas sector. However these four key issues would face considerable uncertainty in a Biden victory scenario.
The Trump administration put through a tax bill in 2017 with the help of congressional Republican support that cut taxes on corporations and high earners. Biden will likely revisit this with a view to reversing it – a significant risk if Democrats sweep both houses of Congress. Were this to happen, it would weigh heavily on the recovery from the pandemic. Industries such as technology and finance which have been beneficiaries of tax cuts would be hit the hardest.
Biden’s approach to China would likely be more multi-lateral and less impulsive. In the medium term, this would likely aid global trade and lower uncertainty allowing for longer-term global growth related capital expenditure and supply chain optimisations to boost long-term growth prospects.
Biden would likely be far less supportive for energy. He has spoken in favour of restricting fracking on federal lands. While undoubtedly a negative for the E&P players, efforts to slow fracking on federal lands could be slowed in legal challenges. But supply may be boosted by an agreement with Iran, putting downward pressure on prices.
We expect drug prices to be in the firing line regardless of the election victor. The US subsidizes global drug development, and as a result, Americans pay more for drugs than most other developed countries. Arguing for price reductions can be an easy target for politicians across the spectrum and we expect politically induced, deflationary forces to pick up across the pharmaceutical sector. A Biden win could also cut reimbursement for healthcare services. He supports expanding Medicaid, meaning more people would have insurance, but that insurance would likely pay less for services rendered. Given the huge amount of lobbying power exerted by the healthcare sector, expect to see these intentions slowed and diluted as they go through the process.
Kunjal Gala, Global Emerging Markets Portfolio Manager, at the international business of Federated Hermes
The Republican and Democrat parties in the US have substantive differences in economic and foreign policy – on climate change, internationalism versus isolationism, on Iran, Cuba, North Korea, etc. But there is much that unites them in terms of the national interest – the key being the relationship with China. Regardless of which party takes the White House – a more contentious and adversarial interaction with China is likely to continue. The beneficiaries in terms of US outsourcing and strategic partnerships are likely to include India, Vietnam, Brazil, Mexico, Poland. Russia is the wild card. While it is currently closer to China than the West, it could be a surprising beneficiary of worsening US-China power competition, it being tricky for the US to have both China and Russia as simultaneous adversaries.
Should we see a Trump re-election, US equities outperformance to EM equities could continue driven by the sustained EM geopolitical risk premium. North Asia and Information Tech are likely to do well given the correlation to US equities. Not a single EM country outperformed the US market under Trump, although China outperformed EM despite the tensions with US. A Biden victory could lead to the reversal of exceptional US outperformance to EM equities driven by USD weakness and lessening geopolitical risk premium. There is potential for rotation from Growth to Value and a rotation into cyclicals, given the emphasis from Biden on fiscal stimulus and the significant outperformance of growth over value in the last few years. Less emphasis on tariffs as the tool to deal with China trade issues could improve global trade outcomes, a boost for EM growth. Sectors such as materials, energy, real estate, industrials could outperform and EM commodity-markets, such as Brazil and South Africa, would benefit. Overall, Biden’s election will likely be more favourable to Asia/ EM assets.
For Russia, there are two main issues to consider regarding the upcoming US election, although they overlap; in both cases the key is to what extent the election becomes a catalyst for additional US sanctions on Russia. Russian interference during the 2016 US election was the main catalyst for the CAATSA sanctions Act in 2017 and (more indirectly) the RUSAL sanctions imposed in 2018. The question now on investors’ minds is whether we are now going to see a return to this harsh sanctions’ agenda, involving areas such as sanctions on sovereign debt, dollar transactions by state banks or energy exports.
Secondly, there is the question of how US policy towards Russia could change if (as looks increasingly likely) Biden wins the election and the Democrats take control of the Senate. The two issues overlap because the Democrats have generally been the most hawkish in pushing for new sanctions on Russia, particularly regarding electoral interference. Concern over both issues – possible Russian electoral interference and a likely Biden victory – are arguably already having an impact on investor sentiment towards Russia. Indeed, the US election is likely the main issue, together with the current oil price and the impact of the coronavirus on the economy, that has been weighing on the currency and the local market over the last couple of months.
With much of Latin America struggling with economic difficulties and a health crisis, many countries will need support from multilateral organisations (at last count, Argentina, Ecuador, Bolivia, Costa Rica and Venezuela have either requested support or need to), and under normal circumstances would also look to the US. However, the reality is that whoever wins in the US elections, the focus will be on the national agenda. The US is also dealing with a public health crisis, high levels of unemployment and a social crisis. Even in the order of foreign policy priorities, Latin America doesn’t present a major threat or a major opportunity for the US. Therefore, except for Mexico (which is sensitive to changes in domestic economic policy in the US), we shouldn’t expect any meaningful changes in the near term for Latin America as a result of the US elections.
Steve Auth, Chief Investment Officer, Equities at Federated Hermes, Inc.
With the election a week away, we remain overweight equities and bullish on 2021 regardless of the outcome. There are just too many positives lining up for the year ahead: a likely sharp cyclical recovery, an ultra-easy Fed and potentially multiple vaccines, to go along with the eventual end to election uncertainty. Getting from here to there, however, could be a little bumpy as Covid cases rise, near-term stimulus hopes fade and the recovery shifts to a more muted expansion.
In our view, the best possible outcome for the market is a Republican Senate and either Biden or Trump as president. Given the ill will between the two political parties, little likely would be done other than perhaps an infrastructure bill, which would be market positive. Trump’s lower tax regime would remain in place, supportive of growth and earnings. The market would for once be able to ignore politics and focus instead on the strength of the economy and next year’s likely dramatic earnings rebound. Given that this is the more positive outcome, and the less expected one, we think the market could rally 10% or more if a divided government results from the election.
The chance of a Democratic sweep has both positives and negatives for the market, which in our view may net out to be a wash, at least for 2021. While taxes almost certainly would be going up, both personal and corporate, demand would be stimulated even more by spending/redistribution programs in excess of the real tax take. On the corporate side, while a 28% tax rate would probably hit earnings in most sectors between 10-15%, that hit would probably be dwarfed early on by the dramatic earnings rebound as the economy laps the lockdown months of February through July of 2020. Longer term, while supply-side thinkers like Federated Hermes would probably cut our out-year growth forecasts, demand-side economists would project better growth. Net net, a Democratic sweep might not cause an immediate pop in markets post the election, but we think it would likely not cause a big retrenchment either.