2020 Election Update

US Election Result:
Potential Policies?

The results are in and former Vice President Joe Biden has won the election. But the Senate is still uncertain (and potentially it will remain in Republican-control).

Join Director of Market Strategy Liz Young and Mellon CIO of Equities John Porter as they discuss possible market implications.

Biden presidency faces potential battles ahead

November 7, 2020

It appears Democrats have taken control of the Presidency under Joe Biden but control of the Senate is still in question. Managers from BNY Mellon Investment Management outline how they expect the result to impact markets and sectors over the coming months should results hold.

Results appear to show that Joe Biden has won the US presidential election, but it is still unclear if Republicans have retained control of the Senate. The latter could hinder implementation of the Democratic Party’s future policy program.

It was against the backdrop of a global pandemic that an often bitter election campaign played out: now, the question for investors is how different asset classes are likely to respond and what political power a Biden White House can realistically assert if Congress remains split.

Regardless of a favorable outcome for Biden’s team, the prospects of a Democratic-sponsored hike in corporate taxes, a focus on a ‘green’ agenda and the potential for increased cooperation in the international sphere could possibly face Republican opposition.

Despite Biden’s win – and beyond party politics - Newton Investment Management global equity portfolio manager Paul Markham believes it could be a tough challenge for his party to satisfy its political base for new social policies, given the US’s poor governmental financial position - on account of its efforts to tackle the Covid-19 pandemic.

“Higher taxation or further increases in government spending could cause headaches for the Democrats – the forthcoming four years will be very difficult– and what has been pledged by the party in terms of social and health care may prove hugely challenging to actually deliver. Democratic pledges on social and healthcare changes could be especially difficult to deliver, given the currently challenging government financial predicament,” he says.

April LaRusse, Insight Investment's head of investment specialists, believes key government policies are likely to remain unchanged under Biden, though she adds that the Presidential change and a wider mood shift could benefit risk markets.

“In our view, if the Senate does remain in Republican control, this outcome could mean key policies like corporate taxes will be unchanged. That said, we would expect to see government bond yields move somewhat higher and risk assets rally, though not to the extent seen in 2016 given existing Fed policy. While an infrastructure deal might be less likely, so is further trade escalation, and so we may see tradeexposed names benefit from that.”

In contrast, Alcentra co-chief investment officer Leland Hart is more concerned by the election outcome, in light of the potential market uncertainty it could generate.

“We view the latest election outcome as a fairly negative result given the political uncertainty that may ensue. Ultimately, it means we could soon start to lose clarity on whether there will be decisive action by government and continued strong support for the economy,” he says.

Hart says decisions on where and how support to sectors of the economy is delivered could become more complex and subject to political division between Republicans and Democrats. “In the recent past both sides have tended to politicize decision marking, often with a negative impact on markets, including private credit markets.”

Newton Investment Management global strategist and member of the Real Return Team, Brendan Mulhern supports the view that potential bi-partisan conflict risks slowing economic progress and could dent market confidence.

“The lack of action a split House and Senate might bring about has been on display this year with the Republicans and Democrats unable to agree on another fiscal package to support the economy. It’s difficult to say how much of this is down to the two parties playing politics ahead of the election but if the House and Senate is still split there may be concerns that policymakers in Washington will not be able to act decisively to counter the impact of the Covid-19 pandemic on the economy. This may come to weigh on market sentiment and expectations,” he says.

John Bailer, lead portfolio manager of US dividend-oriented and large cap strategies at Mellon, also feels the Biden administration could adopt a moderate approach. On a more optimistic note he adds that, ahead of the election, the market was pricing in a Democratic sweep, so some sectors – such as financials, energy and defense which performed poorly before the election – might now rally. He adds: “Possibly the most meaningful change would happen with executive orders and appointees to Government agencies.”

“I would expect more international cooperation, therefore helping companies hurt by the trade wars. Mergers & acquisitions could slow with a more consumer focused Department of Justice. Since 1933, a divided government with a Democratic President has led to 13.60% returns in the S&P 500,1 which has been better than average.”

Newton head of fixed income Paul Brain is also optimistic government spending could continue to support the US economy and hopes international trade relations might also thaw under Biden. Separately, he also expects to see a rise in US Treasury yields following the latest election.

“We would expect to see a new stimulus package put in place and global trade relationships improve a little, even if some US trade pressure remains on China. The US dollar could bounce back now that election uncertainty has been removed, but the trend is still likely to be lower against Asia in particular.

“In bond markets, we would expect yields in the US Treasury market to rise faced with the prospect of more government spending, with the curve steepening. Investors in risk assets such as credit may be concerned about the potential for increased corporate taxes later, though initially, government spending plans look set to dominate and improve the outlook. We would expect the US dollar to weaken over time as domestic spending increases and takes in imports and emerging markets outperform.”

For Jeff Burger, senior portfolio manager, Mellon, one asset class that may benefit is municipal bonds. “Under a Biden Presidency infrastructure spend may actually pick up – funded largely by the sale of municipal bonds. Here, we believe there could be an emphasis on ‘green’ and environmentally sensitive projects as a way of providing economic stimulus,” he says.

Burger also raises the prospect of a push by Democrats to raise corporate taxes. If successful, this could also spark inflows into municipal bonds, given the tax exemptions they offer investors, he says.

Meanwhile, Insight fixed income fund manager Gautam Khanna believes the Senate staying Republican under a Biden presidency means game-changing policies are less likely. In his view, markets will take comfort that further trade flare-ups are less likely (a positive for emerging markets and trade-exposed names), while possible Senate resistance to tax hikes will also be viewed positively.

However, the Senate could also look to curtail Democrats’ fiscal spending ambitions, with pandemic relief packages and renewed infrastructure spend likely to face deadlock. The potential deregulation roll-back may also hurt sectors such as energy and autos, he adds.

“If the pandemic continues to deteriorate and a narrow Republican Senate majority is a roadblock to a larger fiscal stimulus package, this ‘stimulus disappointment’ could cause increased volatility, offsetting the positive certainty on the tax front,” he says. “Nonetheless, markets are often comfortable with a lack of real policy change – so, for now, we see that result as positive for risk.”

Global equities: The long-term view

For the Walter Scott investment team, the outcome could represent a change of direction in US policy with the prospect of higher taxation (albeit with more fiscal stimulus), wider health care benefits, a higher minimum wage and a re-engagement on climate changes issues. Even so, just how much of that agenda will actually be enacted depends on the extent to which a Republican Senate might counter some of these policies, aside from the question of government finances. They add: “Markets have increasingly anticipated policy shifts, but whatever the political landscape, we’re confident the US will remain a haven for enterprise and innovation. We’ve found that long-term growth patterns for businesses able to adapt and innovate are rarely significantly altered, whatever the political twists and turns.

1 Strategas as of October 14, 2020. Past performance is no guarantee of future results.



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