Financials benefited significantly from the Trump administration’s deregulation and appointment of industry-friendly policymakers. We do not expect as much focus in this campaign: a tax rise would hit earnings and consumer-facing products may incur margin shrinkage. Substantially tighter financial regulation in the coming years, however, is unlikely given the regulatory changes post the Global Financial Crisis that remain in place.
The proposed green policies present a switch proposition. Mr. Biden’s plans could benefit Utilities in terms of their transition toward cleaner electricity generation. This could mirror large European electricity providers that have enjoyed re-ratings on the back of their leadership in energy transition. By contrast, the already pressurized Energy sector could be hit by these fiscal policies even as low oil prices are offering no relief to their profit and loss accounts.
The cyclical groupings of Industrials and Materials are traditional beneficiaries of infrastructure spending. Whilst the latter will have to contend with lower defense orders for aerospace equipment, the miners and construction material companies in the Materials sector are well placed for new building projects.
Meanwhile there could be mixed results for Consumer Discretionary businesses including retailers, hoteliers and leisure companies. With a fillip to the consumer balance sheet under Mr. Biden, there may be upside from consumer spending, but many of the corporates are large employers of lowly paid workers. The outlook may not be as rosy as after the last Democratic win, when large investor inflows followed.
By contrast, Technology has a relatively low labor/capital mix and would be less affected by employee wage hikes. This sector stands out for its secular growth opportunities, but these could be tempered near term by tax changes and a more determined stance on antitrust enforcement.
Overall, US and global equities could see a rise in volatility over coming months until markets can reasonably forecast an outcome. Such an uncertain environment could lend itself to taking a selective approach to investment. During the 2016 election, we witnessed a dramatic widening of dispersion of returns between sectors and a sharp rise in interest for sector exchange-traded funds as a means of positioning against various political outcomes.
While all the sectors will face mixed implications across different industries, we look favorably on Healthcare, Materials and Utilities as being well placed to navigate any political transition in the US.
In addition to the pandemic, social justice themes will be a significant feature in coming years. The priority would be criminal justice reform to lessen police abuse and reduce the disproportionate sentencing of black youth. It goes without saying that the investment implications of the Black Lives Matter movement cannot be overemphasized. Such a major societal change will inevitably drive investment decisions and corporate governance in the coming years.
Together with the increased environmental focus, this focus on social justice is likely to accelerate environmental, social and corporate governance parameters in the US to that already seen in Europe. Among sectors, Utilities are better positioned in relative terms to take advantage of this new trend.
The authors are grateful to Anthi Tsouvali and State Street Global Markets for contributing to the article.