On US election day, one of the most unprecedented election campaigns in American history is at its end. Campaigns were halted and then restarted online as both candidates tried to get their message across amidst a global pandemic. This all happened against a backdrop of large-scale civil unrest sparked by the killing of George Floyd.
According to predictions, the president’s handling of both issues has seemingly cost him a second term in office, but as was the case in 2016, polls do not always tell the complete story.
Estimated chance of winning
Source: The Economist
Frank Rybinski, senior investment strategist at Aegon Asset Management, said there are two likely scenarios for the upcoming US presidential election: a Democrat clean sweep, in which the Democrats take the White House and Congress; or a divided government, with a Trump president beholden to a Democrat-dominated Congress.
“The Democrat clean sweep scenario would accompany a sizable increase in government spending funded in part by higher taxes,” he said. “Overlay this with a Fed that is committed to keeping monetary policy easy and you have a recipe for a steeper curve and a cheaper dollar.”
He said this would be an interesting reverse of the loose fiscal and tight monetary policy which defined the Ronald Reagan regime of the early 1980s.
“While we expect a similar stance towards trade no matter who is in the White House, the difference would likely come in the tone of the rhetoric,” said Rybinski.
In terms of regulation, energy, healthcare, finance and technology would be key sectors to watch if Democrats control the White House in a divided government.
Below, Rybinski and the team at Aegon evaluate the impact of the two nominees on key sectors of the US economy given their disparate styles and proposals.
Banks and finance
“The promised tax hikes and increased regulation would pose a headwind to aggregate earnings per share (EPS) growth,” said the Aegon strategist, on Biden’s potential impact on the banking and finance sector.
“Looking globally, the weaker US dollar combined with a more diplomatic trade stance would likely be a positive tailwind for emerging market assets.”
Rybinski was neutral on the impact to banks and financial markets if Trump remained in office.
“We anticipate a continuation of the status quo,” he said. “Although with a chance for further positive implications in the areas of taxes and regulation.”
Biden, meanwhile, could attempt to rollback deregulation and implement new policy, “which would likely diminish profitability, but possibly be partly offset by the additional stimulus and higher interest rates”, said the strategist.
Basic materials
In the basic materials sector a Trump victory would likely see tariffs stay in place, environmental regulation remains lax, and green initiatives related to carbon emissions unlikely to be implemented, according to Rybinski.
These would be modest positives for the basic materials industry (including chemicals, metals, paper), according to the team at Aegon, but they warned an aggressive stance towards China and trade would negatively affect demand.
On the other hand, a Biden victory was far more negative for the industry based on the risk his administration poses to the chemical sector: mainly, an outright ban on fracking, which could lead to an increase in natural gas feedstock costs – used to support manufacturing processes.
“Furthermore, Biden’s plan to increase the corporate tax rate is expected to have a disproportionately negative impact on companies with higher US income exposure,” said the strategist.
However, Rybinski conceded that the ‘Green New Deal’ could be positive for battery metals and chemical demand.
“Biden's infrastructure plan calls for increased spend on affordable housing which could benefit titanium dioxide players and companies with exposure to wood products,” he added.
Energy
Although neutral on Trump from an energy standpoint, Aegon’s Rybinski said a second term would be accommodative for the industry. However, he believed a Biden presidency would have a negative impact on energy.
US oil production under a Biden government
Source: FT
Nevertheless, the strategist said there were tailwinds in Biden’s calls for stricter rules for fracking and increased scrutiny of pipeline development and approval.
“Drilling restrictions on federal lands would most directly impact upstream companies with high exposure,” said Rybinski. “The spill over effects would hit midstream companies and already challenged oil field service providers.”
While Biden has been a vocal critic of fracking, he has admitted that a transition is needed and would unlikely impose a ban in the near-term.
Healthcare
“We see the fundamental impact on branded pharmaceuticals as modestly negative under a second Trump term and negative under a Biden presidency,” said Rybinski, on the healthcare sector.
He explained that while Trump has previously shown interest in reducing prescription drug costs, Biden supports more wide-ranging legislation on branded pharma, including limiting price increases on all branded, biotech and “abusively priced” generic drugs to general inflation rate.
Their outlook on Trump is also heavily dependent on the proposed Affordable Care Act (ACA), which is due to be argued in front of the Supreme Court on 10 November.
Healthcare costs in the US (% of GDP)
Source: Centre for Medicare Services
“Our view is that retention is the likeliest outcome, but if the ACA is invalidated there could be meaningful disruption across the industry, particularly towards healthcare providers,” he said.
Conversely, Rybinski said legislation from the Biden camp would strengthen the ACA and reduce the age of Medicare eligibility from 65 to 60, having a significantly positive effect on its recipients.
“If achieved, these policies would positively affect healthcare facilities and services as well as healthcare equipment and supplies,” he noted.
Technology
Finally, while the bipartisan consensus still remains concerned about the size and influence of large technology firms, Aegon’s global credit research team believe that both Trump and Biden will continue to work in bringing technology manufacturing back to the US in the interests of national security.
“With Trump we anticipate a continued tough stance on China that could strain supply and accelerate re-domiciling of supply chains,” said Rybinski.
On the other hand, the strategist added that a Biden presidency would be characterised by increased regulation around privacy, antitrust and taxes.