Market Views: How would a Biden win affect equities?
The global political and investment climate has undergone a huge shift since Donald Trump became US president four years ago.
In 2018, Trump began to impose tariffs and other trade barriers on China alleging "unfair trade practices". These were the opening shots in the US-China trade war, which continues to rattle markets.
Most recently, the Trump administration has also instructed US federal pension funds to halt their investment in Chinese stocks. The Covid-19 pandemic has also intensified tensions between the two superpowers.
As US voters prepare to go to the polls on November 3, AsianInvestor asks six investment experts what the ramifications on US and Asian equities will be, as well as what changes might be seen in US economic and foreign policies, should Democratic nominee and former vice-president Joe Biden win the election.
AsianInvestor will collate comments on what the impact will be on asset pricing should Trump win re-election, in the Market Views column next week.
The contributions have been edited for clarity and brevity.
Jim McDonald, chief investment strategist
Northern Trust
Increased taxes top the list of investor concern with respect to a Joe Biden presidency. His current plan would raise tax revenue by – partly – reversing the Trump tax cuts for corporations and raise taxes on those with income above $400,000. The worry is that these tax hikes will hurt economic growth and snuff out the current recovery.
While we believe the Biden tax plan could lead to increased consumption, there is no doubt that an increase in corporate taxes will be a direct hit to company bottom lines. We expect the full implementation of the Biden tax plan to reduce S&P 500 corporate earnings by between 6-7%.
Higher taxes could also hurt American companies’ competitiveness. This may cause some downward valuation adjustment, but some tax increases will not eliminate other structural economic advantages found in the US.
With any change in administration, and especially when the party platforms differ by so much, some sectors become more attractive while others suffer.
In a democratic sweep, we would likely see a reversal of the deregulatory environment. Offsetting some of this risk might be trade and immigration policies that investors embrace.
The winners and losers at the sector level are probably easier to project than the macro impacts. We see utilities, health care and information technology as likely winners, while energy and financial services may be relative losers.
Asian equities might see some relief from the tariff wars seen under the Trump administration, but could also feel pressure if a Biden administration is more successful in building a coalition to pressure China. We expect companies to continue to “re-shore” operations out of China, and China and the US will increasingly operate as two separate economies as globalisation wanes.
Sean Taylor, Asia Pacific chief investment officer
DWS
If Joe Biden wins the election with a democratic sweep we may observe an increase in corporate tax rates and rising investment in clean energy infrastructure.
Equity performance is predominantly driven by earnings. US equities earnings, however, have been boosted by lower interest rates and significant corporate tax cuts in recent years. The reverse of the 2017 tax cuts would hurt both the earnings prospects of US companies as well as the outlook for US equities.
On the other hand, an environmental, social and governance-focused infrastructure bill would boost the ESG movement and benefit US renewable energy companies.
Asian equities may benefit from the weakness in the US dollar due to rising fiscal spending. Downside risks remain for Asian equities as the tension between the US and China, especially in the technology sector, is likely to continue.
Technology and internet companies remain vulnerable to disruptions and sanctions which may result in higher volatility in Asian equities. Further restrictions on [Chinese companies’] ADRs [shares listed in the US] may hurt sentiment, though it benefits Chinese investors and Hong Kong as more Chinese ADRs seek secondary listings in Hong Kong.
Ultimately, a sustained recovery in global growth, risk sentiment and corporate earnings is needed before we will observe a strong performance in Asian stocks.
Sean Markowicz, strategist for research and analytics
Schroders
If Biden wins the presidency, there is a potential risk of an increase in US corporate tax rates which could impact equity markets. Given that Trump lowered the tax rate from 35% to 21% in 2017, which delivered a major boost to US earnings per share (EPS) and stock prices, Biden has said that he would like partially to reverse this policy in early 2021. That could have significant consequences for equity investors.
Katie Deal, US equities analyst
T. Rowe Price
No matter which party wins the White House, we should not expect a significant shift in the increasingly negative trajectory of the US-China relationship. Joe Biden is expected to favour multilateral coalitions and the development of trade policy through partnerships with mutual allies.
But tariffs will be difficult to remove in the near-term without any signs of tangible progress and national security concerns over technology will remain. In aggregate, a Biden victory should still be slightly positive for Asian equities as it eliminates some of the policy uncertainty that we’ve experienced with President Trump.
The key to future policy changes would be to know who controls the Senate. In the context of a Democratic sweep with a comfortable margin, we focus on two important policy changes: higher taxes and a climate plan.
Biden has indicated that he would raise taxes to finance domestic programmes. We estimate that the rate increases would collectively reduce S&P 500 company profits by 9% to 11%. Some industries, like utilities, could see fewer adverse effects.
In addition, Biden has an ambitious climate agenda. With $2 trillion in federal investment, he aims to create jobs, modernise critical infrastructure, and support the growth of green technologies. We would expect this to be negative for US oil and gas operators and positive for the electric vehicle industry.
Kiran Nandra-Koehrer, senior product specialist for emerging market equities
Pictet Asset Management
First off, US public opinion on China remains negative some of which is linked to increasing rhetoric in the run-up to the US election.
Trump’s commentary can be termed as ‘America First’ (withdrawal from the Trans-Pacific Partnership, renegotiation of the North American Free Trade Agreement) although Joe Biden has shown more openness (willingness to form global alliances in pursuit of shared goals). So at the margin one could argue that Biden is better from a globalisation perspective, which would be helpful for equities generally.
One thing to bear in mind is valuations. The MSCI Golden Dragon Index, which captures the equity market performance of large and mid-cap China securities, is trading at a 35% discount to the S&P 500 Index. Valuations are really supportive for Golden Dragon both relative to its own history but also in relation to the US. Regardless of the election outcome, it’s not as though Chinese equities are in any way expensive.
As active stock pickers, picking the winners or undervalued stocks remains key. From an Asia ex-Japan perspective, e-commerce, consumer and healthcare [sectors] remain of interest as does the overlooked speciality finance industry.
We expect business models that are able to move up in terms of consumer take-up to continue to perform, notably online offerings. All of this remains valid regardless of the top-down geopolitical moves.
Esty Dwek, head of global market strategy and dynamic solutions
Natixis Investment Managers
In our latest survey study, we found that US elections were among the top concerns for strategists and managers. The majority of respondents felt that Joe Biden would be better for the global economy, global trade and for current geopolitical tensions. On the other hand, President Trump was seen as the better candidate for equity markets. Regardless of who wins, we should expect some volatility and potentially a bit of a correction post-election, but not a massive sell-off.
From a market reaction perspective, it seems that the markets are underpricing [both] the risk of Biden winning and higher taxes. There seems to be something of a trade-off as well, however. We already know that taxes will probably go up if Biden wins, but at the same time, some believe that with Biden in the White House, there will be less uncertainty, less unpredictability and less unilateralism.
We should be careful in thinking "hopefully Biden wins and then things get better". Both sides definitely have a Cold War view with regards to China. I do not think, however, that the underlying tensions between the two superpowers are going to disappear, even if it is Biden who wins the election.