This is Part III of a mini-series that looks at the US Presidential Elections. Parts I and II examined the macroeconomic and broad asset class choices in the context of the elections. In early September, we will publish a comprehensive and in-depth report on equity market performances in relation to past elections as well as expected moves this cycle.
This is the third installment of our mini-series on the US elections. The first part took into account market risks that may arise from a disputed US election, while the second part reviewed competing policy platforms and their implications for asset allocation. Although we concluded that equity investing would overall become more challenging under a Biden administration, we also suggested that there would be some winners from his public investment plans. In this third part, we would like to provide an overview of equity sectors that would lend themselves better to the policies of a Democratic government.
Key Policy Drivers
First, it is important to note that most tax plans are broadly negative. Above all, plans to increase the statutory corporate tax rate, raise the tax on foreign earnings (Global Intangible Low-Taxed Income) and set a minimum corporate tax rate are all headwinds to earnings. On top of that, plans to raise personal tax income on the wealthiest Americans (higher capital gains taxes on million-dollar plus capital income and raising payroll tax threshold on households earning over US$400,000) could further drain capital out of financial markets.
Second, there is likely to be a determination to boost earnings and bargaining power of labor. The most glaring area is the expectation of an increased federal minimum wage, but there would be other measures that could prove to be costly to labor-dependent industries as well.
Third, the degree of margin erosion that a rollback of the policies of Trump administration can cause is less quantified. There could be broad disruption from new regulatory appointees, changes in fiduciary powers, new consumer protection powers and an overarching push to promote climate change mitigation. Add in the aim to reduce income and racial inequalities, and it is clear that the regulatory landscape will be uneven. Individual companies and industries could be affected in varying magnitudes, resulting in some interesting investment opportunities.
Fourth, a Biden administration would be more determined to promote public investment. US infrastructure remains starkly underfunded and the post-COVID-19 economic shock should facilitate the political case for government spending to boost the economy’s recovery. In his pre-COVID-19 platform, Joe Biden had already foreseen an annual boost of roughly US$500 bn, focusing on healthcare, transport, housing and education (especially early education and childcare).
Mr. Biden has now added a substantial front-loaded proposal to enhance government spending on R&D (half of which is to be directed toward clean energy) as well as US-focused procurement of products, materials and services. In this approach, only the defense industry would be a net loser of government spending.