By shifting away from the nationalistic policies of the Trump administration — during which international stocks underperformed US equites by 44%1 — the Biden-Harris administration is likely to usher in a more global agenda with respect to trade, diplomacy, and climate policy.
Unlike broader policy proposals, such as tax increases and a multi-trillion-dollar infrastructure spending plan that both depend on Congress to enact, the new administration can use executive orders and re-engage with international organizations to reshape trade and climate policies. Together with improving economic fundamentals and ongoing secular trends, these policy pivots on trade and the environment could jump-start investors’ interest in Asian emerging market equities and potentially amplify the growth trajectory of clean power and clean technology companies.
From negotiating trade deals to regulating intellectual property, competition will always define the US-China relationship. However, Biden’s more diplomatic and partnership approach — a reprieve from the Trump administration’s harsh rhetoric and punitive tariffs — is likely to make trade policy less confrontational and more predictable.
This shift in tone and policy may lay the foundation to restore investor confidence in China and other Asian countries that have been negatively impacted by the trade tensions over the past three years. As shown below, while both markets have trailed US equities since the onset of the Trump administration’s trade war — which intensified in March 2018 with 25% tariffs on steel imports and 10% tariffs on aluminum imports2 — sentiment has shifted recently, coinciding with Biden’s improving polling numbers and subsequent victory. Yet even with this recent rally, Chinese equities are still down 12% relative to US equities since the end of 20173 — an indication of the potential upside of a “back-to-even” rally if trade tensions thaw and the tariffs are reduced/removed in favor a more cooperative trade agreement.
Improved regional integration could further rejuvenate the region’s growth and support economic recovery. China and 14 other Asia-Pacific countries recently signed the Regional Comprehensive Economic Partnership (RCEP) to reduce tariffs, enhance market access and increase economic cooperation within the region.4 The pact covers about 30% of the world’s population with a combined gross domestic product (GDP) of $26 trillion and trade volume of $10 trillion. It’s expected to raise global national incomes by an estimated annual $186 billion by 2030 and increase trade among members by an estimated $428 billion.5
The potential for greater regional cooperation combined with an easing of US-China trade tensions may compound China’s already strong growth. As the bright spot in a gloomy 2020 global economy, China’s Q3 GDP growth improved to 4.9% from 3.2% in Q2 and -6.8% in Q1,6 when the country imposed a nationwide lockdown to contain the spread of COVID-19. The economic recovery strengthened in October, as both domestic consumption and fixed-asset investment grew at a faster pace than during the prior month, paving the way for greater growth in the final quarter of 2020.7 Forecasted to be the only major country with positive growth in 2020, China also leads global growth expectations for 2021. In fact, China’s 8.2% expected growth rate is more than 5 percentage points higher than the US’s rate of 3.1%.8
This upside potential in Chinese equities also comes with constructive relative valuations. The region’s forward price-to-earnings, price-to-sales, and price-to-book ratios9 are trading at a discount that is either at or below the historical median relative discount to US stocks, indicating growth/upside exposure at a reasonable price.
According to Biden’s transition website, climate change is one of the four priorities that his administration will focus on from Day One.10 Calling for a carbon pollution-free power sector by 2035, the new administration has pledged to invest in clean infrastructure and technologies, public transportation and electric vehicles, and environmental justice.11
While Biden’s ambitious clean infrastructure stimulus plan may be watered down given the composition of Congress, there are other ways that he can push forward his environmental agenda. Biden has pledged to immediately rejoin the Paris Agreement,12 which places voluntary limits on nations’ greenhouse gas emissions. He also could reinstate climate and environmental regulations that the Trump administration has either revoked or rolled back, including vehicle and power plant emission standards.13 Biden also could issue an executive order to ban new oil and gas drilling on federal lands and direct federal agencies (the Environmental Protection Agency and Department of Energy) to craft new rules and regulations on emission standards and how companies assess climate risk. These policy initiatives are likely to fuel America’s transition to clean energy, boosting demand for clean technology and environmentally friendly energy solutions.
Another tailwind is that as people continue to work remotely and spend more time at home, energy consumption expenses will transition from businesses to households — leading to even greater demand for cost-efficient energy. In fact, the cost to generate renewables has already fallen by 40% (wind) and 80% (solar) over the past decade.14 And based on the pre-Biden regulatory environment — without even accounting for the policies he is likely to put forth or changing energy-consumption needs due to COVID-19 — wind and solar energy are projected to account for more than 60% of the new electricity-generating capacity over the next decade, as shown below.
Overall, Biden’s climate change agenda will likely accelerate an already strong secular trend line, amplifying the growth trajectory of the clean power industry. Even during the more pro-fossil fuel Trump administration, the shift to more renewable forms of energy had begun, as advances in clean technology significantly reduced the costs and improved the efficiency and accessibility of wind and solar energy. And while there was little support at a national level, state-level environmental targets, private funding and the public’s interest in climate change have fueled US renewable energy consumption growth for the fourth consecutive year in 2020 — exceeding coal consumption for the first time on record in June 2020.16
Shares of clean power stocks have recently shown strong performance, reflecting the already budding trend. In 2019, clean power firms outperformed the S&P 500 Index and the S&P 500 Energy sector by 31% and 51%, respectively.17 However, the pandemic’s impact and Biden’s win have turbocharged the industry’s performance, lifting it by 89% year to date, compared with 14% for the S&P 500 Index and a -36% loss for the traditional Energy sector.18
Despite this outstanding performance over the past two years, the clean power industry’s total market cap is much smaller than the traditional Energy sector’s market cap during the energy boom in the early 2010s. Clean power accounts for just 2% of the market cap of the Russell 3000 Index — compared with 10% for the traditional Energy sector at its peak.19 Given the expectations for capacity additions, behavioral shifts, and the Biden administration’s transformative global policy initiatives, the share of power generated from clean energy sources is likely to surge — indicating that clean power stocks may still have room to run.
With more global coordination emanating from 1600 Pennsylvania Avenue, investors may want to consider overweighting the two areas that we believe are most likely to be directly impacted by the new administration’s agenda.
To position for improving global trade relationships, consider:
To position for an emphasis on global climate policy and clean fuel, consider:
1 Bloomberg Finance L.P. as of November 18, 2020 based on the return of the MSCI ACWI-Ex US Index versus the S&P 500 Index.
2 “Trump to Impose Sweeping Steel and Aluminum Tariffs”, New York Times March 1, 2008.
3 Based on the return of the S&P China Index and the S&P 500 Index from 11/30/2017 to 11/18/2020, per Bloomberg Finance L.P.
4 RCEP: A new trade agreement that will shape global economics and politics, Brookings, November 16, 2020.
5 East Asia Decouples from the United States: Trade War, COVID-19, and East Asia’s New Trade Blocs, June 2020.
6 Bloomberg Finance L.P., as of November 16, 2020.
7 Bloomberg Finance L.P., as of November 16, 2020.
8 IMF World Economic Outlook, October 2020.
9 Price-to-earnings ratio is at the 53rd percentile, Price-to-book is at the 47th percentile, and Price-to-sales is at the 48th percentile relative to the ratios for the S&P 500 Index, per FactSet as of October 31, 2020 based on a 15-year lookback.
10 Biden’s transition website: www.Buildbackbetter.com.
11 Biden’s transition website: www.Buildbackbetter.com.
12 Here’s how Biden could get the US to lead on climate change again, The Washington Post, November 17, 2020.
13 The Trump Administration Is Reversing More Than 100 Environmental Rules, New York Times, November 10, 2020.
14 IEA – Short-Term Energy Outlook as of 5/2020.
15 Amazon has committed $2 billion for a new Climate Pledge Fund and reported it is on track to source 100% renewable power by 2025, Amazon Inc. June 23, 2020. Microsoft will launch a $1 billion Climate Innovation Fund and seek to be carbon negative by 2030, Microsoft Inc. January 16, 2020.
16 Annual Energy Outlook 2020, U.S. Energy Information Administration.
17 Bloomberg Finance L.P., as of 12/31/2019. Clean power is represented by the S&P Kensho Clean Power Index. Traditional energy sector is represented by the Russell 3000 Energy Sector.
18 Bloomberg Finance L.P., as of 11/16/2020. Clean power is represented by the S&P Kensho Clean Power Index. Traditional energy sector is represented by the Russell 3000 Energy Sector.
19 FactSet, as of 11/16/2020. Clean power is represented by the S&P Kensho Clean Power Index. Traditional energy sector is represented by the Russell 3000 Energy Sector.
MSCI ACWI Index, or MSCI All Country World Index
A free-float weighted global equity index that includes companies in 23 emerging market countries and 23 developed market countries and is designed to be a proxy for most of the investable equities universe around the world.
Price-to-Book Ratio, or P/B Ratio
A valuation metric that compares a company’s current share price against its book value, or the value of all its assets minus intangible assets and liabilities. The P/B is a ratio of investor sentiment on the value of a stock to its actual value according to the Generally Accepted Accounting Principles (GAAP). A high P/B means either that investors have overvalued the company, or that its accountants have undervalued it.
Price-to-Earnings Multiple, or P/E Ratio
A valuation metric that uses the ratio of the company’s current stock price versus its earnings per share.
Share price divided by per share revenue.
Russell 3000® Index
A capitalization-weighted equities benchmark that is designed to be reflect the entire US stock market. The index measures performance of the 3,000 US public companies and represents about 98% of the market cap of US stocks. It is a composite index that combines the Russell 1000 Index of large-cap US stocks as well as the Russell 2000® Index of small-cap US stocks.
S&P 500® Index
A popular benchmark for U.S. large-cap equities that includes 500 companies from leading industries and captures approximately 80% coverage of available market capitalization.
S&P China BMI, or S&P China Broad Market Index
A broad benchmark that defines and measures the full investable universe of publicly traded companies domiciled in China and are legally available to foreign investors.
The views expressed in this material are the views of Michael Arone and Matthew Bartolini through the period ended November 18, 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.
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.
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Investing involves risk including the risk of loss of principal.
Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.
Foreign (non-US) securities may be subject to greater political, economic, environmental, credit and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. These risks are magnified in emerging markets.
Non-diversified funds that focus on a relatively small number of securities tend to be more volatile than diversified funds and the market as a whole.
Clean power companies may be highly dependent upon government subsidies, contracts with government entities, and the successful development of new and proprietary technologies. Clean power companies may be affected by competition from new and existing market entrants, obsolescence of technology, short product cycles, changes in exchange rates, imposition of import controls, and depletion of resources. In addition, seasonal weather conditions, fluctuations in supply of and demand for clean energy products or services, and international political events may cause fluctuations in the performance of clean power companies and the prices of their securities. Risks associated with fluctuations in energy prices and supply and demand of alternative energy fuels, energy conservation, the success of exploration projects and tax and other government regulations can significantly affect clean power companies.
Concentrated investments in a particular sector or industry (technology sector and industrials 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.
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