28 October 2020
•
US Elections: Blue wave?
With Joe Biden's Democrats predicted to take both the Presidency and both Houses of Congress, five investors discuss the short- and longer-term market implications of a 'blue wave'.
Photo: Gage Skidmore/Flickr CC BY-SA 2.0
Jeffrey Sherman, portfolio manager of Nordea's US Total Return Bond strategy
If we see a 'blue wave', with the Democrats dominating all three chambers – the presidency, the Senate and the House – there could be a more co-ordinated effort to push through policy.
A landslide victory in either direction is what the market is looking for, just so we do not have further massive uncertainty in the coming months.
A 'blue wave' would likely result in corporate profitability being impaired a little, simply due to the tax hike. However, both parties are spenders.
The notion Democrats are the spending party and Republicans are ultra-fiscal conservatives was blown out of the water by the Tax Cuts and Jobs Act a couple years ago.
There is going to be more spending, irrespective of the leadership. The Trump administration has been free flowing with money and stimulus is all the talk in town – so I do not see anything changing there if he is re-elected.
Ultimately, regardless of the winner, we are going to see significantly higher burdens of debt. US debt has finally exceeded 100% of GDP and spending is going to continue, but there must be a pressure valve.
Typically, this comes through inflation or currency.
Taymour Tamaddon, portfolio manager of the T. Rowe Price US Large Cap Growth Equity fund
If Biden wins the upcoming election and the Democrats also control Congress, his corporate tax plans alone could result in a 7%-8% decline in S&P earnings.
However, on the flipside, a 'blue wave' could result in significant stimulus – potentially upwards of $3trn. While stimulus of such size may have repercussions needing to be dealt with three or four years from now, in the immediate term, it would clearly result in higher growth.
This stimulus is why equity markets are not pricing in the clear negative implications of higher taxes. In addition, there is a belief not all the tax changes Biden is proposing would be enacted.
In any event, the Senate race is going to be remarkably close, and if we see a 'blue wave', Democrat senators from historically Republican states may not be comfortable with significant tax increases.
At a sector level, most investors view a 'blue wave' as negative for healthcare, with the multiples of healthcare companies near all-time lows relative to the broader market.
However, I am overweight the healthcare sector, largely because most market participants do not fully understand Biden's proposal, as well as the actual difficulty of passing healthcare legislation in the US.
Dissecting Biden's proposal, I expect it to be encouraging for the healthcare universe. With increased insurance comes improved access to healthcare, which essentially leads to a positive outcome for healthcare companies.
Andrew Lake, head of fixed income at Mirabaud Asset Management
Joe Biden is clearly ahead in most of the polls, which is increasingly giving markets comfort he is going to win. What we have seen is the treasury curve steepen as a 'blue wave' is priced in.
The reflation trade is also back in focus, as a huge stimulus package would be on the docket for early 2021. However, there can be a huge margin of error in some of the polls.
It is rare to have the presidency and Congress in the hands of one party, so there is room for disappointment should the Republicans hold onto the Senate.
This would re-price the size of any stimulus package and outweigh the positivity of a clear presidential result.
The worst outcome would be for a contested presidential election result and a divided Congress.
If we do see a decisive Biden win, as well Democrat control of Congress, we should see the treasury curve steepen and widen.
Given the neutral policy rate is 2.5%, there is plenty of room for the 30-year to move over the next several months.
When would we see the US Federal Reserve step in? At 2%? Or 3%? It would not want to see financial conditions tighten too much.
The 10-year could easily move back to 1% and higher over the following months. The US dollar would weaken, and we would be set up for emerging market and high yield bond outperformance next year.
Robert Tipp, head of global bonds at PGIM Fixed Income
While pundits have feared a Biden presidency might unduly burden the economy with taxes and thereby hurt markets, additional fiscal stimulus, especially in the case of a Democratic sweep, could more than offset the negative impact of the tax hikes.
Yes, taxes could go higher, but based on the proposed stimulus packages thus far – sub-$1trn from Republicans and more than $2trn from Democrats – and setting aside which is 'best', the markets have clearly traded positively on news of bigger stimulus and traded off on news of stimulus delays.
Given the slack in the economy, the Biden platform certainly has plenty of planks that could be fashioned into stimulus dollars in the event Democrats end up in the driver's seat.
The election process, the policy aftermath and the virus – before, during and after – will keep the shock waves coming.
But markets appear to be at least partially braced for protracted election chaos, further virus waves and the wait for a vaccine.
Adrien Pichoud, chief economist and senior portfolio manager at SYZ Private Banking
This election's vitriol – as well as the danger of social unrest and a Supreme Court appointment threatening existing healthcare policies – will keep financial markets on alert.
Faced with these uncertainties, it would be highly risky to position portfolios for a specific election outcome, especially if volatility intensifies with a contested result.
We have moved our portfolio to a more neutral stance, by cutting exposure to core US ETFs and blended active quality and value strategies.
At the same time, we have increased our exposure to China, through a local A-share China ETF.
Nevertheless, we recently reduced duration and rate sensitivity because of the rising probability Biden will sweep both houses. We expect there to be a relatively steeper rate scenario.
We are also keeping some exposure to equities, preferring quality companies with high levels of long-term free cash flow.
Any period of intense volatility in the weeks ahead will offer opportunities to build or add exposure to such names.
Despite the political noise, we expect the currently favourable market environment, which relies heavily on fiscal support and very accommodative monetary policies, to persist.
Therefore, we do not see a scenario where it makes sense to resort to holding cash or move to zero-yielding government bonds.
Just days out from one of the most antagonistic elections in US history, polling suggests the Democrat party is poised to capture the presidency and both houses of Congress – which is being referred to as the 'blue wave'.
Just days out from one of the most antagonistic elections in US history, polling suggests the Democrat party is poised to capture the presidency and both houses of Congress - which is being referred to...
To continue reading this article...
Join Investment week
- Unlimited access to real-time news, analysis and opinion from the investment industry, including the Sustainable Hub covering fund news from the ESG space
- Get ahead of regulatory and technological changes affecting fund management
- Important and breaking news stories selected by the editors delivered straight to your inbox each day
- Weekly members-only newsletter with exclusive opinion pieces from leading industry experts
- Be the first to hear about our extensive events schedule and awards programmes
