The Biden bounce - Market implications of a US election
Although still subject to some legal disputation, markets so far have confidently concluded that Democrat Joe Biden will be the next U.S. President. This note assesses the current U.S. political situation and the potential investment implications of a Biden presidency.
Why a re-run of the 2000 contested election is unlikely
Despite long-feared legal challenges from President Trump, the markets so far are discounting the risk of a drawn-out contested election result – as last seen in 2000. Back then, Democrat Al Gore requested a recount of votes in the tightly contested state of Florida. The recount was ultimately denied by the Supreme Court, meaning that George W. Bush became the next President.
Unlike in 2000, however, Biden is ahead in several states, and by considerably wider margins than was the case for Bush in Florida. In 2000, moreover, neither side was arguing there had been an orchestrated campaign to deliberately tamper with the vote results – rather, it was a technical debate on whether certain votes could be accurately recorded and whether a statewide recount was appropriate.
All up, the legal hurdles facing Trump this time around are much higher, as he needs to provide evidence of large scale systematic vote tampering across several states.
So what does Biden care about?
While every incoming President pledges a wide range of new policy measures, those indicated below appear to have the most direct impact on the economy and investment markets if implemented.
Immediate stimulus payments to households
Biden should provide another boost to consumer spending, which in turn will support the consumer discretionary sector. Indeed, irrespective of whoever won the election, it was likely that the U.S. would enjoy yet another fiscal stimulus package by early 2021.
Under Biden, the package is likely to be larger, though take longer to be enacted, given he does not formally take control until 20 January. It is also more likely to be directed at lower/middle income households (rather than companies) – via one or several stimulus cheques. Biden is also likely to boost the top-up Federal payments made to those collecting state unemployment benefits – a further support to consumer spending.
Expanded access to affordable healthcare
Biden offers mixed news for the U.S. healthcare sector – likely expanded access to health care service, though greater downward pressure on private sector margins.
Although Biden has not proposed introducing universal health insurance across the country, he has indicated a desire to create an affordable public health insurance option (such as Medicare currently provided to the elderly), to add competitive pressure on higher-cost private funds, and to expand access for those still without insurance.
He has also wants to allow public healthcare providers an ability to negotiate for cheaper drug prices – something current health legislation prevents – which could help keep publicly run healthcare insurance premiums competitively low.
Clean energy and climate change
Biden will likely facilitate the structural change towards clean energy alternatives, favouring innovative companies in the renewable sector to the detriment of traditional fossil-fuel producers and distributors.
Under Biden, the U.S. will likely formally rejoin the Paris Climate Accord. He has indicated a desire for America to adhere to the global pledge of zero net carbon emissions by 2050. He has also pledged to spend $US1.7 trillion on research into green technologies.
Biden could offer a lot more work to civil engineering/construction companies through a renewed focus on infrastructure. He has pledged to spend money on rebuilding America’s dilapidated public infrastructure – ranging from roads, bridges, and railways to airports, sea ports and inland waterways.
Getting tough on China
Under Biden, China may well face greater pressure to open up its economy to outside investment and imports.
Rather than the unilateral actions of President Trump, Biden has pledged to build a coalition of like-minded democratic countries to collectively tackle China’s lingering restrictions on trade and investment, as well as its increased military adventurism in areas such as the South China Sea.
Concern with China could also see expanded Western engagement with other countries in the Asia region, such as India, Vietnam, South Korea, Japan and Indonesia.
Corporate tax increases and greater regulatory scrutiny of Big Tech
The most serious immediate risk to corporate profits and Wall Street is Biden’s plan to increase the corporate tax rate to 28%, after it was lowered by President Trump from 35% to 21% in 2017. A Biden administration could also regulate Big Tech, potentially through forcing a break-up of large companies – but more likely by limiting their ability to merge and/or buy up smaller potential rivals.
Social media firms also face growing pressure from both sides of politics to better moderate user-provided content, though opinions differ on the nature of the problem and what should be done.
What about the Senate?
The ability of Biden to push through new policies will also depend on the Senate.
At this stage, there will need to be two run-off Senate elections in Georgia to decide the final Senate outcome. The Democrats need to win both these seats to gain 50 seats in the new Senate, which would effectively given them a majority to pass legislation, with Vice-President Kamala Harris casting the deciding vote. Current polling, however, suggests the Democrats won’t get to 50. Either way, that would still leave Democrat policies at the mercy of the ‘filibuster’, or a procedural way of blocking passage of Senate legislation unless it passes by at least 60 votes.
Democrats have talked about imposing new rules (which is possible with a simply majority) that would effectively end the filibuster, though there is concern this could also make it easier for Republicans to pass their own legislation in future years.
For his part, Biden has indicated he will at first try to work with Republican senators if need be to pass legislation, but if that proves too difficult he would then consider pursuing changes to the filibuster rule.
The bottom line is that the likely tight Senate numbers and the filibuster rule will limit the ability of Democrats to push through all that it wants – such as raising corporate taxes and much tougher regulation of industry. Indeed, given the risk of primary election challenges by more extreme right-wing rivals, many Republican senators will likely find it hard to compromise.
Bottom line: A less erratic President and a return to Washington ‘gridlock’
All up, the outcome of U.S. elections is likely close to a best case scenario for markets – a more moderate, less erratic President, whose most market-worrying policies are likely to be thwarted by the Senate. Biden is unlikely to seriously challenge Big Tech or unwind much of Trump’s corporate tax cuts.
The key sector shift under Biden, however, will be to encourage the transition to cleaner energy to the detriment of the traditional fossil fuel industry. That would be especially favourable to investment exposures such as that offered by our global ethical ETFs, the BetaShares Global Sustainability Leaders ETF (ETHI) and BetaShares Global Sustainability Leaders ETF – Currency Hedged (HETH), which provide exposure to a portfolio of large global stocks identified as ‘Climate Leaders’ that have also passed screens to exclude companies with direct or significant exposure to fossil fuels.