Investment Management –
Market Flash: US Elections
Welcome to Market Flash - a communication authored by Arbuthnot Latham’s Co-Chief Investment Officers, designed to give you time-sensitive information regarding the material events that impact the markets.
What happened?
Last week was indeed a true nail-biter as we all watched the results being tallied. In over two decades of investing in markets, I have never witnessed such heightened uncertainty in anticipation of an election result. With so much at stake, from US energy policy to climate change, global trade, fiscal stimulus to the level of taxation, investors waited patiently with the knowledge that either result would lead to very binary outcomes. In the run-up to the election, we hosted several Around the World virtual talks for clients and friends of Arbuthnot Latham during which we discussed the mega-trends shaping the financial markets and, of course, the hot topic was the Presidential race - the challenges facing both candidates and how the results would potentially impact markets. When I think back to when I first made the forecast that Biden would win the election, I also remember thinking to myself ‘What if Trump wins?’ It was for this reason that our Investment Committee avoided taking any ‘big positions’ either way in the run-up because there was every possibility that the pollsters would get it wrong – and indeed they did. The result was much closer than forecasted, leaving us with confirmation that America is indeed more divided than many believe.
How have the markets reacted?
US equity markets rallied last week going into the result and continued to perform strongly this week, helped by an announcement on Monday of a possible vaccine out of Pfizer and BioNtech. On the heels of this report, we witnessed a significant rotation in favour of those COVID sectors which have been heavily ‘beaten up’ since March such as banks, airlines and energy companies - this whilst big technology companies sunk as investors moved from ‘growth’ into ‘value’ (performed the best into the most depressed).
It is interesting to observe how the narrative is developing and how the market is looking favourably upon the prospect of a ‘divided government’ (with Republicans controlling the Senate and Democrats controlling the House, with their guy in the White House). Chatter amongst traders has been around how stock prices could benefit from this new gridlock as the ‘wings of potential extreme policy’ have been clipped. In other words, the Blue Wave didn’t happen so the possibility of significant spending and tax hikes are now probably off the table due to the fact that the Senate will most likely remain in control of the Republicans. This has been accompanied by some dollar weakness along with a sell-off in US government bonds, perhaps in acknowledgment that the purse-strings will be loosened (but not lost).
What can we reasonably expect from Biden/Harris going forward?
We think it’s fair to assume that the trend will be firmly towards undoing much of what Trump & Pence did over the course of the past four years but the challenge Biden & Harris face is that, without full congressional control, unwinding some of those policies may prove difficult.
The policy will ‘reset’ as Biden leads the United States back into organisations such as the World Health Organization, partnerships such as the TPP and multinational accords such as the Paris Climate Agreement, restoring a sense of ‘predictability’.
The tone will definitely change (there won’t be any sabre-rattling on Twitter) but the stance won’t. Biden appreciates that the US’ share of global GDP continues to shrink (in the early 1970s it was approximately 40% and today it is approximately 24%) and his administration will be quick to establish common ground with the Republicans regarding staying ‘tough on China’ and perhaps exchange that for a softening of their stance on another policy areas which is important to the Democrats. President Xi has been preparing for this, as evidenced by the emergence of the theme of ‘self-reliance’ during their new five-year plan.
In the short term, it’s highly probable that some form of fiscal package gets pushed through as, amongst other things, unemployment insurance benefits need extending. But dreams of ‘fast and furious’ fiscal will probably have to be shelved. The mega-question then becomes: What about infrastructure? Will it happen and in what format? This will be one of the stories to watch closely.
As it relates to the Federal Reserve, we would expect Biden to defend the independence of the Fed, which seems like a reasonable position to our Investment Committee. And from those policy makers, we forecast rates to be ‘lower for longer’ as communicated during their recent announcements.
The intention will be to increase corporate and income tax rates but again, without congressional control, this becomes difficult. The same would be true of increases to the minimum wage, which can be viewed as another form of taxation on corporates – which could negatively impact earnings.
Biden & Harris support the expansion of the Affordable Care Act and have vowed to ensure that Americans with pre-existing diseases receive coverage. Healthcare has a mixed outlook as Biden’s push for expansion for insurance coverage could benefit the service providers but his intent to bring down drug prices might be negative for big pharma.
The President-elect has been very vocal about climate change and is committed to cleaner energy production. In a clear reversal of the Trump administration’s dilution of environmental standards, he is also likely to implement tighter emission standards. But I don’t think it’s game over for the energy sector. Many of these firms are controlled by seasoned executives who are in the process of pivoting their businesses in an attempt to reinvent themselves to benefit from this exact trend (this theme of de-carbonisation is something our Investment Committee is considering investigating from a research perspective). So let’s not count them out just yet.
Biden & Harris are already preparing their COVID taskforce and it’s probably fair to assume that there is a higher propensity for business lockdowns going forward which could a) spell trouble for the already battered retail sector and b) have a negative knock-on impact on the commercial property sector. Having said that, the commercial property sector is so large and wide in the US, we are careful about making such generalisations. Finally, any increase in minimum wage or student loan forgiveness could benefit consumption as this group has a high propensity to spend.
There has been general unease amongst Democrats that Big Tech has grown too big, too powerful and controls too much data. Biden himself has voiced concern over Section 230 which provides immunity to platforms from what users post. Could we see an increased risk of anti-trust initiatives? I suspect so but I would remind our readership that Biden is also a Centrist who won’t want to kill the golden goose and he may rather focus his energy on increasing R&D and investment which could favour certain sub-sectors of technology like electric vehicles, 5G rollout and internet infrastructure.
Conclusion
Perhaps a gridlocked government isn’t such a bad thing for markets as the prospect for extreme outcomes recedes and the strong rhetoric subsides. Our current outlook is positive for equities, neutral to positive on credit, negative on government debt, neutral on commercial property. We maintain a slightly negative view on the US dollar and have a favourable opinion on the prospects for infrastructure. In our recent Investment Committee meeting we voted to take small satellite positions in cyclicals to reflect our pro-recovery stance. Finally within alternative we remain investing in long/short equity, global macro and are initiating positions in convertible arbitrage.
Finally, a kind reminder that we are always delighted to hear from you and would welcome your questions, comments and thoughts on our communications. So please don’t hesitate to contact us because although face to face meetings are difficult at the moment, we are always only a telephone call or an email away.
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Author -
Gregory Perdon
Co-Chief Investment Officer, Arbuthnot Latham
+44 (0)20 7012 2522
Gregory Perdon has served as Arbuthnot Latham’s Co-Chief Investment Officer since 2011. He is Co-Chair of the Investment Committee, specialising in managing global cross asset mandates. He is also responsible for the firm’s Thematic Investment Research. He is regularly quoted in the financial press, guest hosts on Bloomberg Radio & TV and frequently serves as moderator, panellist or speaker at investment conferences in the UK and abroad. Gregory started his career at Oppenheimer after graduating from the American University of Paris in 1997.
Married, with four children, he enjoys raising funds for charities by climbing 4000m mountains in the Alps. Gregory holds both French and American passports, is a Chartered member of CISI and was named by Citywire as one of the Top 100 most influential wealth managers in the UK.