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.
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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.
Scenario 4: an ugly stand-off
If a split Congress and a Biden victory represent a “sweet spot” for markets, then the “nightmare scenario” is a disputed election, where one side refuses to accept the result, says Russ Mould of stockbroker AJ Bell. Many investors have “bad memories” of the 2000 election, when George W. Bush and Al Gore fought over a recount in Florida. By the time the Supreme Court finally ruled in Bush’s favour, the S&P 500 had lost 12% of its value. Of course, the “bursting of the technology, media and telecommunications bubble” also weighed on markets at that stage. Still, it’s undeniable that investors would “take fright” if one side refused to back down, “and where the United States goes, the rest of the world follows”. The uncertainty would be likely to prompt a “dash for save-haven assets”, good news for gold and the Japanese yen, but “bad for the dollar and global stocks”.
The “large-scale use of postal votes”, Trump’s claims about the “possibility of voter fraud” and his apparent refusal to confirm that he would hand over power all mean that a close result for either candidate is likely to be disputed, says Paul Craig, portfolio manager at Quilter Investors.
However, such a scenario is not inevitable, especially if Biden wins convincingly enough to make any challenge redundant. Even if Trump does try to string things out, the US constitution has a clearly-defined process for determining the result, including the provision that if things break down completely, the speaker of the House of Representatives (Democrat Nancy Pelosi) will be sworn in as acting president, which the Republicans would want to avoid at all costs.
And even though Trump has prevaricated on whether he will accept defeat, several senior Republicans, including the current Senate majority leader, Mitch McConnell, have promised that there will be an ordinary transfer of power, with the winner of the election sworn in on 20 January next year. Trump’s allies, such as senator Lindsay Graham, have said that, while Trump will be entitled to take any challenge as far as the US Supreme Court, they will accept the court’s judgment, even if it goes in Biden’s favour.
If post-election uncertainty does push stocks down, this could quickly reverse itself once things are resolved, says Craig. Shares have demonstrated their “remarkable ability” to bounce back swiftly from shock events once already this year, when the S&P 500 fell a third in the space of a month, only to recover all the lost ground by late summer. It is therefore “not beyond the realms of possibility” that they will be able to do so again.
What won’t change: spending and money printing
The overall stockmarket backdrop seems unlikely to change much. Federal Reserve chairman Jerome Powell has publicly supported the idea of a further fiscal stimulus. He has said that monetary policy and fiscal policy should “continue to work side by side to provide support to the economy until it is clearly out of the woods”. The Federal Reserve, meanwhile, will continue to print money whoever wins. All this in turn implies further dollar weakness – an additional tailwind for US stocks. A weaker greenback boosts the value of foreign sales at US companies, which in the case of the S&P 500 comprise around 45% of overall revenue.
Despite the deep divisions between the two candidates, moreover, there are some areas of policy agreement that should benefit particular sectors. So, if you want to “election-proof”, your portfolio, these are worth a look. Firms in cyclical sectors, notably medium-sized retailers, should do particularly well, reckons Mould. Not only are these companies cheap relative to the rest of the market, but they should benefit from the inevitable post-election fiscal stimulus, as both candidates are committed to accelerating the recovery from Covid-19. Both candidates are also hoping for a resolution to the crisis in the form of a vaccine, as soon as possible, with Pfizer promising to have enough data to request emergency-use authorisation by the end of the year. While the US Food and Drug Administration (FDA) has suspended the US trials of AstraZeneca’s vaccine, its trials have restarted in the rest of the world, and they would find it hard to refuse authorisation if results were encouraging.
At the same time, technology companies will face headwinds whoever wins. Indeed, Facebook and Twitter have managed to find themselves in the crossfire with Biden and the Democrats accusing them of fostering division and turning a blind eye to election manipulation, while Trump and the Republicans have claimed that they are censoring conservative opinions. As a result, it is likely that the winner will continue to attempt reform of Section 203, the US legislation that shields social media platforms from any liability connected with the material that they host. Big Tech as a whole, meanwhile, has incurred the wrath of the House antitrust committee.
The stocks and funds to consider now
Biden’s plans for reducing carbon emissions, “which go further than any previous Democratic presidential hopeful”, says Whitney Voûte of the US Solar Fund, should help renewable-energy stocks. They have already ticked up in anticipation of his victory.
The iShares Global Clean Energy UCITS ETF USD (LSE: INRG) is an exchange-traded fund (ETF) that tracks the S&P Global Clean Energy index. It invests in 30 large renewable-energy companies, roughly half of which are headquartered in the US.
The two biggest holdings are Sunrun, a California-based residential solar power, and SolarEdge, an American firm working with Tesla Motors to produce cheap battery storage for residential solar panels.
The only downside is that the ETF has a trailing price/earnings (p/e) ratio of 32. The fund has an ongoing charge of 0.65% a year. If you want a more direct bet on the American solar power industry, then it’s worth considering the US Solar Fund (LSE: USF), which aims to invest in a portfolio of solar power farms across the US.
It runs 38 plants across America, spread across four states (North Carolina, California, Oregon and Utah), and is in the process of building three more.
The fund currently pays a dividend of 2%, but hopes to increase this to 5.5% once all plants are fully operational, targeting an overall return on invested capital of 7.5% over the lifespan of the project.
However, if you think that Donald Trump will win, then you might consider Exxon Mobil (NYSE: XOM), America’s largest oil producer. In stark contrast to other energy companies, which have cut their dividend and increased their investment in renewables, Exxon has stuck with fossil fuels and remains a major shale producer.
While the market clearly expects Exxon’s management to go back on its promise to maintain its dividend, the current yield of 10% means that even a large cut will still give investors a hefty payout at current prices.
A Trump victory could also boost the shares of financial stocks such as Bank of America (NYSE: BAC). Experts suggest that Biden’s tax reforms could hit Bank of America particularly hard, reducing its profits by nearly 10%, while the group could also suffer from higher compliance costs. Bank of America trades at 12.5 times 2021 earnings and has an above-average dividend yield of 3%.
Both candidates have proposed spending large amounts of money on infrastructure if they win, both in order to speed up the recovery from Covid-19 and to upgrade America’s productive capacity, bosltering future growth. The drive to improve infrastructure will lead to an increase in the demand for heavy equipment. This is good news for industrial and construction-equipment rentals firm United Rentals (NYSE: URI), which we’ve tipped several times in the past. The stock trades at a mere 12 times 2021 earnings.
Another equipment-rentals firm worth investing is Ashtead Group (LSE: AHT), which, although listed in the UK, derives 90% of its revenue from North America via its subsidiary Sunbelt Rentals. Sunbelt operates in 700 locations throughout the United States. Ashtead has enjoyed strong growth, with its revenue doubling over the past four years, more than justifying a valuation of 18 times 2022 earnings.
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