Author: Alastair George
Within the next 2 weeks, 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 a Biden victory is the most likely outcome in our view. However, there is also a significant chance of a contested election and weeks, if not months, of legal uncertainty. Time is running short for any waning of Biden’s lead into polling day and a clear Trump win at this point appears 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 still the dominant 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 rising strategic challenge from China.
In the short term and in policy respects there is relatively little to choose between the candidates. We believe markets would take a second term for Trump in their stride, having become habituated to volatile and confrontational foreign policy, combined with a US business-friendly domestic agenda.
Furthermore, both Biden and Trump will need to tackle the outstanding issue of a fiscal stimulus package to address ongoing 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 to date have had an exceptionally good crisis. The strong performance of the S&P 500 stands in contrast 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 – targeting not just China but also 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. However, with a less business-friendly US administration investors may look towards other less highly valued markets over the medium-term. 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. For example, 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. A political test of the resolve of the new administration from China would also be a possibility during 2021.
However, we believe a Biden administration would also aim for a lower profile package 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 in each US state, if it was believed that due process was not followed during the election. The battle lines in respect of mailed-in votes, which will account for a many times larger share of the total than in previous years, have already been drawn by Trump’s campaign with teams of 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.