October 2020

Thanks to awesome government stimulus we have an economic recovery and magnificent equity markets.

Poll data continue to predict a US election win for the Democrats. But the risk of there being no clear winner is high. A Democrat win should be good for infrastructure-related and climate-neutral businesses.


The US election – Who’s going to win?

We currently have four scenarios

I. The Democrats win the Presidency and take control of both the Senate and the House of Representatives.

II. A Democrat win but the Senate staying in Republican hands.

III. President Trump is re-elected.

IV. No clear winner, with many recounts and the final result perhaps having to be decided by the courts.


What are the opinion polls saying?

Americans view President Trump negatively on a number of issues, specifically on economic inequalities, national security, civil disobedience and political unrest, the Covid-19 pandemic, domestic politics and (surprisingly) the economy and financial markets. According to surveys, the majority view the challenger Joe Biden as having significantly greater competence on these points. But President Trump is viewed as having more expertise and better negotiating skills in the areas of trade and tax policy (Source: MKT MediaStats).

In practically all polls, Joe Biden is ahead of the President. Given the competence assessments with regard to concrete, urgent problems that need to be solved, this is hardly surprising.

In addition, President Trump has antagonized large swathes of the media, even in the so-called “Swing States”. The impact of Covid-19 on the US economy will likely reduce Trump’s chances of re-election. Often the government is blamed and punished for an increase in the unemployment rate and for a recession, regardless of whether this is fair or not.


Preliminary conclusion

According to current information, the chances of President Trump getting re-elected are slim. The polls and the betting odds all predict a win for the Democrats in the upcoming Presidential election. But four years ago, almost all the evidence pointed (falsely) to a Democrat win. So caution is in order. We attach a significant probability to our Scenario IV, whereby there is no clear election winner and view the overall result as quite uncertain. November 3rd is still several weeks away, and a lot can happen between now and then. Evidence that an end to the pandemic-related US recession is within sight could have a decisive impact on the result.


Major differences between the two parties from the investor point of view

Democrats want to raise corporate tax from 21% to 28% and want a “fairer economy”. Thus, capital gains taxes for those generating more than $1 million in capital gains in a year would be increased as would payroll taxes for those with an annual income over $400,000. In addition, foreign corporate profits are to be taxed more heavily. (Specifically, the global intangible low tax income – GILTI – rate on foreign profits would rise from 10.5% to 21%.) And companies deemed to have relocated business operations outside the US to the detriment of US workers would also face higher taxes.

Elsewhere, Democrats would also like stronger incentives for a more climate-friendly environmental policy. The excessive cost of US healthcare would be addressed through stronger cost controls, while the Federal minimum wage would be raised, and the bargaining power of workers and employees increased. Antitrust legislation would be applied more aggressively.


Democrats want more government spending

Spending on infrastructure, especially “green” infrastructure, would be increased. The budgets for education and training would also be expanded thanks in part to savings in defense.


Implications for markets of a Democrat win

First an analysis for the overall market. The consensus view is that the re-election of Donald Trump would be better for stocks as Joe Biden wants to raise corporate taxes and reverse deregulation. Recent high dividend payouts and share buybacks are widely viewed as the direct result of the Trump Administration’s corporate tax cuts. (US companies increased share buyback programs almost 50% after the 2018 tax cuts.) Joe Biden has made several negative comments on share buybacks and would like to ban them for companies deemed to have gained from the so-called “Coronavirus relief bill”.

Such reasoning is not wrong but we assess it in the context of our belief that Washington under Democrat control would pass much larger packages of fiscal stimulus, which in turn would force the Fed to monetize even more government debt. The logic here is simple: higher government spending means the Fed will have to expand its balance sheet more aggressively in order to finance larger Budget deficits. Democrat plans to finance significantly higher government spending via higher corporate tax revenues are partly fantasy. In the end their spending objectives will require Democrats to apply so-called Modern Monetary Theory (MMT) even more unrestrainedly than hitherto under President Trump’s Republican Administration.

It is likely that more aggressive overall fiscal and monetary stimuli under the Democrats will more than offset the negative stock market impact of tax hikes and reregulation over the medium term. Thus, we would expect US markets to do even better over time under the Democrats than were President Trump to get re-elected.


Relative losers in the event of a Democrat victory

Democrat plans to cut the defense Budget mean defense-related companies could be among the main losers. And Democrat concerns over climate change could spell trouble for the fossil fuel energy companies. Big tech, especially the FAANGs, could be negatively affected by increased regulation under the guise of “consumer protection and anti-monopoly policy”. Joe Biden is a moderate Democrat but would like the government to be more aggressive in curbing high US healthcare costs
through increased regulation of the sector. As a result, the healthcare sector – pharmaceutical, biotech and medical device companies – could get hit. Democrats also want to raise the Federal hourly minimum wage from $7.25 now to $15 by 2026. Low-wage workers likely to benefit are concentrated in the tourism, leisure, hospitality, hotel and retail sectors. If the Democrats win, companies in these sectors, especially those with already low profit margins, stand to be among the relative stock market losers.


Relative winners in the event of a Democrat victory

Companies that dedicate themselves to climate protection or which benefit indirectly from increased spending on climate protection are likely to be among the main winners. Climate policy is one of the main differences between the two candidates. Joe Biden would strive for a carbon-neutral, “green” economy. President Trump, on the other hand, would continue to promote coal and oil. Therefore, “sustainable” stock indices should benefit from a Biden win. Democrats want significantly greater public investment in infrastructure. Infrastructure stocks and indices that could cover this area should benefit. Small and medium-sized companies have been among the main losers during the pandemic, while “mega-caps”; especially in the technology sector, have been among the main winners. Here too, the Democrats want to redistribute and might try to support smaller and medium-sized companies more. However, any such support could be more than offset by an increase in the minimum wage. Stricter regulations imply higher costs for almost all companies. Given their often-lower margins, smaller companies stand to be disproportionately affected. Therefore, a Biden win is not necessarily positive for small companies and could even be negative despite Democrat wishes to strengthen their relative position. A belief that Joe Biden will win does not in our view mean that you have to go out and buy small and mid-caps.


Contact: Thomas Härter, CIO, Investment Office
Telephone: +41 58 680 60 44

Disclaimer: The information and opinions in this document come from sources that are considered to be reliable. Nevertheless, we cannot guarantee the reliability, completeness or accuracy of these sources. The information and opinions in this document do not constitute and shall not be construed as a solicitation, offer or recommendation to purchase or sell any investment or to engage in any other transaction. We urgently recommend that interested investors consult their personal investment advisor before making any decisions based on the document so that personal investment objectives, financial situation, individual needs, risk profile and other relevant information can be duly taken into account in conjunction.