What the race for the White House means for your money

American voters are about to decide whether Donald Trump or Joe Biden will take the oath of office on 20 January. Matthew Partridge explains how various election scenarios could affect your portfolio.

The US presidential election has been one of the most bitter and contentious in living memory. With 3 November now less than three weeks away, you may be tempted to go and lie down in a dark room until the dust settles. But that could be a mistake. We have often pointed out that people tend to overestimate the impact that politics has on investment portfolios; in America’s case, the economic cycle is generally far more important than the election cycle. But this contest could prove an exception to the rule – especially since there is a chance that the result may not be clear for some time. So it is worth reviewing what a victory for Joe Biden or Donald Trump could mean for your portfolio, and what impact the vote for Congress or a disputed election could have.

What might happen to monetary and fiscal policy? And will some sectors thrive whatever the outcome?

Scenario 1: Joe Biden wins

Both the polls and the betting markets have Joe Biden as the clear favourite. Betting exchange Betfair putting him at 1.53 to win, which works out at a 65.3% chance of victory. Nate Silver of fivethirtyeight.com gives him a 10% lead in national polls – much larger than Hillary Clinton’s at the same point in 2016 – and an 84% chance of winning in the electoral college. Even Election Projection, run by Republican Scott Elliott, suggests that Biden will get at least 334 electoral college votes, comfortably more than the 270 needed to enter the White House.

One sector to profit from a Biden victory is clean energy and renewables. Eoin Murray, head of investment at the international division of Federated Hermes, points out that Biden has not only pledged to rejoin the Paris Agreement, which commits America to working with other countries to reduce carbon emissions, but he also wants the US economy to be “completely powered by clean energy by 2050”. He will spend around $2trn over four years, including large amounts on research and development (R&D) in order to speed up innovation in green technology.

Healthcare stocks are trading at historically low multiples of earnings in anticipation of a Democrat victory. The worry is that a possible clampdown on drug pricing and further reforms to the US system of private health insurance will crimp profits. But some health insurers could benefit from a Biden win. His healthcare plan wants to reduce the number of people without some form of health insurance (currently around 30 million) through subsidies, essentially an expanded form of the “Obamacare” plan that came into effect in 2014. Murray argues that bringing more people into the system would be good news for the insurance companies that provide a type of insurance called “managed care”: those who have contracts with healthcare providers and medical facilities to cut prices for their members but restrict the range of hospitals policyholders can use, lowering their costs. 

Then there is global trade to consider. A Biden victory would also be perceived as positive for companies outside the US, especially those in emerging markets and Asia. US firms that rely on cheap imports should also do well from a changing of the guard in the White House. Overall, while US hostility towards China “looks certain to continue”, Biden’s approach should be “less impulsive and confrontational than Trump’s” and will generally make “for less of a roller-coaster ride”, on issues such as trade, says Rupert Thompson, chief investment officer of Kingswood.

While some of Biden’s policies will be positive for the market, others are likely to have more mixed effects. Murray notes that a key part of Biden’s healthcare programme is to drive down costs, by capping the prices of the most expensive drugs and encouraging doctors to use cheaper generic versions of branded drugs, where possible. This will be bad news for drug and biotech companies which rely on high drug prices to make money.

Biden’s plans for a higher federal minimum wage, which is currently a third lower in real terms than it was in 1968, after taking inflation into account, will also produce winners and losers. While the measure could boost consumer spending, helping those companies that sell consumer goods, firms that employ a “large number of lowly-paid workers” could see their margins eroded. Biden also wants to raise taxes to pay for increased government spending, including increasing corporation and capital gains tax, both of which could hurt the market as a whole (see page 4).

Scenario 2: Trump is re-elected

While Trump is clearly languishing behind Joe Biden, the unpredictability of the electoral system means that it would be a mistake to write him off. If he does manage to pull off a shock victory, then this is likely to be good news for American oil and gas companies, especially those involved in shale oil and gas, says Randeep Somel, associate fund manager at M&G Investments. Trump is eager to cut regulations in order to boost output, although the sector still faces long-term pressure from the decreasing cost of renewable energy.

Trump’s support for fossil fuels also means that energy-intensive industrials are also “likely to perform better if Donald Trump wins a second term, since they will benefit from access to a cheap source of energy”. Republican support for continuing to increase military spending will also be good for defence firms. Bank stocks will do well from Trump’s efforts to undermine regulations put in place after the financial crisis, as well as from the fact that “taxation will be lower under Trump than compared to Biden’s policies”.His protectionist outlook, however, could also cause problems for companies in emerging markets, and those American companies who benefit from cheap imports, especially if the president maintains his “adversarial” stance around trade relations.

Scenario 3: a sweet spot for markets?

While all eyes have been on the race for the presidency, that’s not the only thing at stake in this election. American voters will also get to vote on the entire House of Representatives, while a third of the Senate is also up for re-election. While the House of Representatives is almost certain to remain in the hands of the Democrats, the Senate is up for grabs, with the Republican majority threatened by several close races in several states (in the event of a Senate tie, the vice-president has the deciding vote). This means that there is a good chance that the Democrats could sweep both Houses of Congress, as well as the White House.

Such a “sweep” would be good for the sectors that already stand to benefit from a Biden victory, since it would make it much easier for the Democrats to implement their agenda, says Reto Cueni, chief economist of Vontobel Asset Management. So, if this happened, renewable energy companies, those involved in infrastructure, and oil and gas companies outside the US, would also see decent gains. However, the downside is that those companies set to do badly from a Biden victory, such as financials, would do even worse as the Democrats implement their entire programme. There might even be pressure for Biden to go further on increasing taxes.

By contrast, a split Congress, where Biden won, but the Republicans retained control of the Senate, could set off a “relief rally”. In this case, shares, in both the US and the rest of the world, would benefit from Biden’s more conciliatory stance on trade leading to “reduced geopolitical tensions”. However, shares would also do well because he would have to tone down planned tax increases and additional regulations in order to get them passed into law.

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