Preparing your portfolio for the US election outcome

Historically, Republican presidents have been more market friendly

Sat, Aug 01, 2020

Ian Black


THE race to the White House is approaching its home straight.

Support for Democratic challenger Joe Biden has surged in the last month, seemingly due to US President Donald Trump's handling of both Covid-19 and the Black Lives Matter movement. But a second term for Mr Trump cannot be ruled out.

It is time for investors to be prepared and consider the market impact of both outcomes.

Historically, Republican presidents have been expected to lead to a more market friendly outcome given their ideological preferences for lower taxes and less market intervention.

At the start of this year, a second term for Mr Trump looked almost an inevitability.

The S&P 500 had registered a 42 per cent increase from his inauguration to the very last day of 2019, unemployment was at a 50-year low, and Mr Trump's grassroots support showed little sign of waning.

The picture has begun to change and as the daily Covid-19 infection count continues to rise, so too does support for Mr Biden in November's election. In fact, a Democratic sweep of both Congress and the Senate looks possible if recent polls are reflected in the outcome in November.

Although nothing is inevitable, it is extremely hard for a president to build a case to remain in office in times of economic underperformance.

The only modern United States presidents to have failed to win second terms, Jimmy Carter and George HW Bush, lost their bids during economic downturns. So how should investors prepare?

It's the economy, stupid

When it comes to the domestic economy, a potential Biden administration will likely implement two measures that will have ramifications for markets.

Firstly, Mr Biden has expressed support for a national US$15 minimum wage. This would hit labour-intensive sectors such as retailers the hardest. But it could provide a tailwind for the less labour-intensive, high margin sectors - as consumers have more money in their pockets to spend each month.

On the other hand, if Mr Trump holds on for a second term, we could expect banks, industrials and infrastructure to mirror their performances in 2016.

Secondly, Mr Biden seems to be ready to roll back Mr Trump's cuts to corporate taxes, either partially or completely. This would simultaneously provide a signal to markets that the new president's views are less market friendly, as well as negatively impacting net corporate earnings for US-based companies.

This may well cause stock values for companies with exposure to the US to fall, and may prompt businesses to reconsider where to base their operations.

It's the environment, stupid

With every passing day, environment, social and governance (ESG) considerations increasingly dominate the investment agenda - a trend that may well accelerate after Covid-19.

In this space, the two candidates are worlds apart.

Following the lead of many other developed nations, Mr Biden has committed to implement a climate plan that will ensure the US reaches net-zero carbon emissions by 2050.

In contrast, Mr Trump has steadily rolled-back environmental protections during his time in office, including withdrawing the US from the Paris Climate Agreement and ending the Clean Power Plan.

In the event of a Biden victory, it seems likely that those firms operating in the green economy will perform well, and those that operate in traditional, carbon-intensive sectors could perform relatively poorly.

Easing of trade tensions?

Throughout his presidency, Mr Trump has made trade with China a key issue in his quest to reshape international trading systems for the benefit of his "America-first" mantra.

Having built barriers to trade, Mr Trump signed a "phase one" trade agreement that, while fairly limited in scope, could be the first of many such agreements with China to gradually liberalise trade - but in a way that is consistent with the US's strategic priorities.

Mr Biden's election campaign statements suggest that he will continue to be strong with China so it is hard to see how the trade tensions will ease following a Biden victory.

Some have suggested that China may take advantage of a change of regime to soften their stance without a loss of face. If this turns out to be the case, relations could improve - and with them trade.

This is an area that investors would be well advised to watch carefully.

In the 2016 election campaign, Mr Trump was the underdog, and the one who could make wild accusations with fairly limited scrutiny of his own record. Things are likely to be very different this time round - putting the president on the defensive, forced to justify his actions in full view of metrics available to evaluate his success.

Anything can happen, and as a matter of prudent risk management, investors should be prepared.

The writer is director of global wealth structuring at AAM Advisory, part of Quilter