Sector investing has historically been an effective way to express market views around US elections (see our recent article), taking advantage of sizeable return dispersion. Indeed, sector ETFs proved a popular tool during the last election cycle, and we expect high interest this time as well.
The following are the 5 sectors we believe could be most affected by the upcoming election and thus provide some of the greatest upside potential or downside risk. We conclude the article with an overview of policy considerations for sector performance and a summary of potential outcomes and their impact across the full range of sectors.
The scenarios for US Health Care are complicated but not as negative as the underweight postioning by institutional investors and current modest rating would suggest.
With a split Congress, Biden’s policies (not as aggressive as some in the Democrat camp) may not have a huge impact on the sector. In spite of the Affordable Care Act, 20% of the US population remains uninsured. Biden’s public option for insurance could allow Americans to buy health insurance (most likely through Medicare) from the government, but using the health care insurers. This could lead to a beneficial outcome for the sector. In the less likely scenario of a full Democratic sweep, the public option could be larger and there would be attempts at controlling drug pricing, which could unnerve the market.
By contrast, if Trump retains the presidency, he may seek further repeals against parts, or all, of the Affordable Care Act. Staying with the status quo may be seen as beneficial for the Health Care sector, with lower headline risk from drastic policy changes. However, the need for either man to manage the country through a pandemic, reliant on health care provision and supplies, with the full opening up of economic activity only possible with an effective vaccine, suggests that the sector may not be hit too heavily for some time.
Biden has a significant green policy with a pledge to spend more than $2 trillion to achieve carbon neutrality within the US power sector by 2035. His “Build Back Better” plan will focus on investing in modern and sustainable infrastructure to encourage clean energy. Businesses focused on renewables may benefit, giving a big option to Utilities companies should they embrace cleaner electricity generation as their European peers have done.
The Utilities sector also stands to benefit from its low correlation and low beta to equity markets, along with its relatively low volatility characteristics, which could help in the event of a negative market reaction to a contested election result.
The much-maligned Energy sector could see more pressure from fiscal policies under a Biden presidency. Biden’s revamped clean energy plan includes aggressive methane pollution limits for oil and gas operations and restriction of production on federal lands. A Democratic sweep of Congress and the presidency would increase support among lawmakers for additional carbon taxes.
This inhospitable outlook for Energy is reinforced by potential Vice President Kamala Harris’s background in environmental justice and could be given structure by re-signing to the Paris Agreement on Climate Change. This would come at a time when the low oil price offers no relief to P&L accounts or cashflow, putting further pressure on dividends and the once attractive yields of the sector.
By contrast, a Trump administration may struggle to further loosen environmental regulations beyond the actions of the past four years. At the same time, without control of the House of Representatives, state environmental restrictions may become tougher.
Banks were in the cross-fire in 2016 but then, early in the Trump presidency, they benefited significantly from deregulation and moves by the Federal Reserve. Expectations are muted this time, and it could be that any change in interest rates or the Treasury yield curve is much more important to profitability than legislative changes.
We expect that regulatory oversight would intensify under a Democratic administration, with a review of the reforms imposed by Trump and support for the consumer over corporations. Most far reaching would be a reimposition of the Glass-Steagall Act, although this would take time and require a sizeable Democrat majority in the House. Either way, a retention of the status quo would likely suit this sector better.
The probable impact is mixed-difficult for Consumer Discretionary businesses. Any boost to the consumer balance sheet under Biden could drive consumer spending, thus helping retailers and restaurants. However, labour-dependent leisure and entertainment industries could be hit by an increase in minimum wages.
Amazon*, which dominates the sector weight and performance, could also be the subject of anti-trust legisation that targets monopolistic behaviour.
On the other side, if Trump were to cut personal tax rates, this could also spur consumer spending. Nevertheless, in all scenarios, we should remember the backdrop of higher unemployment that has arisen due to COVID-19.
Relative sector performance around elections does not neatly fit cyclical/defensive or growth/value themes; other factors tend to provide the headwinds or tailwinds. Consider the experience during the immediate aftermath in 2016, when expectations of lighter regulation helped the performance of Financials and Energy. Winners were also found among sectors with high corporate tax rates given the anticipation of cuts.
Tax will feature again in 2020. As an important revenue raiser for Biden, he has proposed increasing the corporate tax rate from 21% back to 28%, whereas Trump hopes to lower taxes further. Higher taxes imposed by a Democratic House and Presidency could curtail earnings growth and reduce cash flow across the equity markets, albeit with a greater headwind depending on tax rates.
The location of a sector’s main customer bases will also be a factor, with international markets more sensitive to trade relations and/or moves in the dollar, as will employment bases, depending on any minimum wage plans. It is also worth thinking about beneficiaries of infrastructure spending and new green policies.
The table below summarises the impact for each sector in four potential election scenarios, ascribing a net positive, negative, mixed case (with issues pulling in both directions), or limited impact. In the case of a disputed election, equity markets would undoubtedly weaken. Ahead of such a scenario, investors could position defensively in low volatility sectors like Utilities and deploy caution on sectors more reliant on consumer or business sentiment.
Potential Election Outcomes and Their Impact Across Sectors
Source: State Street Global Advisors, as of 1 October 2020. **5 Sectors featured in this note.
SPDR offers a range of ETFs that allow investors to access sectors. To learn more about these ETFs, and to view full performance histories, please follow the links below:
Sources: Bloomberg Finance L.P., for the period 1-8 October 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
* This information should not be considered a recommendation to invest in a particular sector, or security therein, shown above. The stocks mentioned are not necessarily holdings invested in by State Street Global Advisors.
Marketing Communication. For Professional Client Use Only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
France: This document does not constitute an offer or request to purchase shares in the Companies. Any subscription for shares shall be ade in accordance with the terms and conditions specified in the complete Prospectuses, the KIID, the addenda as well as the Companies’ Supplements. These documents are available from the Company centralising correspondent: State Street Banque S.A., 23-25 rue Delariviere- Lefoullon, 92064 Paris La Defense Cedex or on the French part of the site spdrs.com. The Companies re undertakings for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS n accordance with European Regulations. European Directive no. 2014/91/ EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France. The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214- 2-2 of the French Monetary and Financial Code.
Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Web: ssga.com.
Israel: No action has been taken or will be taken in Israel that would permit a public offering of the Securities or distribution of this sales brochure to the public in Israel. This sales brochure has not been approved by the Israel Securities Authority (the ‘ISA’).
Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
This sales brochure may not be reproduced or used for any other purpose, nor be furnished to any other person other than those to whom copies have been sent.
Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder.
This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Italy: State Street Global Advisors Ireland Limited Milan Branch (Sede Secondaria di Milano) (“State Street Global Advisors Milan Branch”) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2. State Street Global Advisors Milan Branch is registered in Italy with company number 10495250960 - R.E.A. 2535585 and VAT number 10495250960, and its office is located at Via Ferrante Aporti, 10 - 20125 Milano, Italy. Telephone: (+39) 02 32066 100. Facsimile: (+39) 02 32066 155.
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
Switzerland: The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstr. 19, 8027 Zurich, as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at ssga.com/etfs.
United Kingdom: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme.
This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
Diversification does not ensure a profit or guarantee against loss.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
State Street Global Advisors SPDR ETFs Europe I & II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
The information provided does not constitute investment advice. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
The views expressed in this material are the views of SPDR EMEA Strategy & Research through the period ending 1 October 2020 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Past performance is not a guarantee of future results.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.
Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future.
Concentrated investments in a particular sector tend to be more volatile than the overall market and increases risk that events negatively affecting such sectors or industries could reduce returns, potentially causing the value of the Fund’s shares to decrease.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss Regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained from spdrs.com. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorised for sale.
© 2020 State Street Corporation.
All Rights Reserved.
Exp. Date: 31/10/2021