The US being the world’s largest economy, investors around the globe will be watching the US presidential race — and its implications of markets —with keen interest.
As the November election draws closer, many equity investors have asked for our views on how the results could determine the US stock market’s overall direction. It’s an understandable concern, considering the fact that we are at a point of the election cycle where President Donald Trump and Democratic presidential nominee Joe Biden are starting to debate policy issues and their plans for the US economy.
Although many investors seem to believe that a Biden win would mark an end to the Trump era’s business-supportive policies, we do not think that is necessarily true. In our view, whichever administration is victorious will likely have to continue to tackle the most significant issue facing the markets right now — the US economic recovery from the Covid-19 pandemic.
We believe a Biden presidency with a split US government could actually be a favourable scenario for the market, as that would ensure incremental policy proposals/shifts from the new administration.
That said, we do not think a split Congress with either Biden or Trump as president means no meaningful US legislation will pass. We see bipartisan support between the Democrats and Republicans in policies related to continued fiscal support for the economy, a long-awaited infrastructure bill and trade.
Areas of bipartisan support
We believe an infrastructure bill will be a priority of either administration in 2021. Looking forward, we’re going to see a legislation to upgrade the nation’s airports, bridges and roads.
In our view, these are the pieces that can make the country move and are more likely to find bipartisan support than areas like green energy infrastructure, which may be more partisan in nature. Our research shows, the plan would also likely include significant funding to improve America’s technology infrastructure, such as access to broadband and fifth-generation [5G] wireless technology. In fact, we think technology is front and centre in many potential post-election policy changes.
On trade policy, there is bipartisan support to protect intellectual property. We believe Biden would continue to pressure China to ensure a level-playing field for technology globally, if he were to defeat Trump, despite a perception that he might take a softer posturing. Thus, we would expect trade tensions to continue under either administration.
We also see support on both sides to bring manufacturing back to the US. Our sense is the Covid-19 pandemic has exposed many weaknesses in global supply chains, specifically within the healthcare sector, and expect other sectors, such as industrials and manufacturing, to continue to move closer to end market consumers in the US. We would hope to see growing bipartisan support under either administration, as these trends can contribute to job growth.
Will a ‘Blue Wave’ lead to US policy changes?
Despite these areas of bipartisan support, we feel the prospect of a Blue Wave or a Democratic sweep is worth monitoring. Under this scenario, Biden becomes President and the Democrats gain control of the Senate and retain control of the House of Representatives. In our view, many investors and market participants share concerns about a single party having unchecked power across all three branches of the government.
Our analysis shows, the US stock market’s biggest fear seems to be that a Blue Wave would lead to a very dramatic shift in policies towards business, markets and regulations. Some frequently discussed issues are an increase in corporate taxes, drastic changes to the healthcare system or regulation of some of the country’s largest technology companies.
Under any election outcome scenario, we will monitor potential policy changes very closely, as well as possible changes to business models of the affected companies. Our role as active managers is to discern how these issues may present risks or opportunities in the market.
While US elections and related implications can create near-term uncertainty, our focus remains on identifying opportunities for investors. Technology and healthcare are two sectors that we believe will continue to see long-term growth. We continue to like the prospects for select companies in these sectors with strong earnings per share and free cash flow.
In the meantime, we believe investors should prepare for bouts of market volatility until the elections are behind us. Markets like certainty, and there are currently many unknowns. The polls currently show a tight presidential race, and we believe they are going to keep the markets on tenterhooks.
(Grant Bowers is Senior Vice-President, Portfolio Manager and Equity Research Analyst at Franklin Templeton. Views are his own)