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Written by: Alistair George | Chief Investment Officer at Edison Group
Within the next week, a very unusual US Presidential election will take place. A significant proportion of voters will not go to polls, but instead due to coronavirus restrictions will send their ballots in by mail. Polls currently indicate that Biden’s lead remains in place in the closing stages of the race and this is the most likely outcome in our view. But there remains a significant chance of a contested election and weeks, if not months, of legal uncertainty. There may still be time for Biden’s lead to diminish into polling day although a clear Trump win at this point looks the least likely outcome.
Investors may be rightfully focussed on other risks at present with developed market GDP still so far below potential due to the fight against COVID-19. The timing of a vaccine and the interplay of monetary and fiscal support over the coming 12 months is likely to be the more important factor for global markets in our view. Nevertheless, the outcome of the US election will set the tone for US economic and foreign policy at a critical juncture, given the strategic challenge from China.
In the short term and in policy respects there will be little to choose between the candidates. We believe markets would take a second term for Trump with limited initial reaction, having become habituated to the volatility in foreign policy but combined with a business-friendly US domestic agenda.
Furthermore, both Biden and Trump will need to tackle the outstanding issue of a fiscal stimulus package to address COVID-19 effects for 2021. Further out, should Biden become President we would expect modestly higher US corporate tax rates which may weigh on sentiment for US equities which have had an exceptionally good crisis. This is especially notable when compared to the relatively weak performance of other developed and emerging markets.
A Democrat President may also look favourably on reducing the alleged monopoly power of the largest US technology franchises. Given the large weighting of these stocks within US indices, this would be a further negative for US markets. On the other hand, the green agenda would receive a boost as Trump’s foot-dragging climate change policies would cease to be relevant.
Biden would also in our view step back from the highly confrontational and unpredictable policies of his predecessor in respect of foreign policy. Trump’s attempts to appeal to his domestic supporters through the threat and use of trade tariffs on foreign goods – and not just China but allies such as European nations and Canada – is likely to be seen as a policy failure in hindsight, delivering neither economic benefit nor polling advantages.
For these reasons, a Biden administration may have relatively little initial impact at the global market level but on a relative basis, investors may look towards other less highly valued markets to deliver returns. For example, we believe the long era of Europe’s consistent equity underperformance of the US could finally come to a close.
While Biden may choose to run a more conciliatory policy towards historic allies, the tensions between the US and China are likely to remain in place. The strategic questions in respect of a resurgent and clearly more assertive Chinese state span the US political divide and represent a national US issue. We do not think a Biden administration would stop the splintering of technology supply chains as firms seek to diversify suppliers to include those outside China for example. A political test of the new administration from China would also be a possibility during 2021.
However, we believe a new US administration would be likely to aim for a lower profile set of China policies. A more carefully assessed long-term strategic objective of promoting an enduring era of US influence, stability and power on the international stage may result. Investors should welcome the absence of unnecessary uncertainty in this regard.
Unfortunately, the probability of a contested result cannot be excluded given the multiplicity of ways that a close result could be challenged in the US courts. There are for example procedural challenges that can be launched if it was believed that due process was not followed during the election and the battle lines in respect of mailed-in votes, which will account for a much larger share of the total than in previous years, have already been drawn by Trump’s campaign with lawyers standing by.
We believe Biden’s campaign is no less well legally-armed which means that a close contest will inevitably be challenged by either side which could lead to months of delay and more importantly the risk of policy paralysis at a critical time for the US economy. It is this result which we believe investors should be prepared for, even if they may be atypically indifferent to the success of either of the candidates.