US elections in the time of corona

Election day in the US is 3 November, but early voting is already underway in many US states. Due to the pandemic, there has also been a surge in voting by mail, which could delay knowing the outcome of the election and create a period of increased market uncertainty. But while this has been an ongoing concern, the now sizable lead of about 10% that Joe Biden enjoys in national polls is reducing the risk of a disputed election and easing these worries.

Based on recent polling data and an analysis by ABN AMRO Group Economics, we believe that Joe Biden will defeat Donald Trump in the race for US president. There is also little doubt that the Democrats will remain in control of the House of Representatives. What is surprising, however, is the increasing chance of a ‘blue wave’, where the Democrats also become the majority party in the US Senate – thus controlling both Congress and the White House.

Democrats are known for their willingness to spend government money, just as Republicans are known to be fiscal conservatives. Joe Biden’s key proposals back this up. His “Build Back Better” plan includes USD 2 trillion investment in renewable energy over four years and USD 1.2 trillion in infrastructure spending over ten years. This increase in spending will be paid for by reversing some of the Trump administration’s corporate tax cuts. Biden intends to raise corporate taxes to 28% – after they were lowered from 35% to 21% by the Trump administration in 2017. If the Democrats take back the Senate, Biden’s tax increase and other proposals will be easier to implement.

Biden has adopted a much more environmentally friendly stance than the Trump administration, including a pledge to re-join the Paris climate accord. His platform also includes a “Green New Deal,” with the long-term target of achieving a 100% clean energy economy and net-zero emissions no later than 2050. His energy proposal includes a long list of climate-friendly projects including wind energy, electric vehicles, smart buildings and low-carbon manufacturing. Biden’s infrastructure plan also includes building not only roads and bridges, but also water systems, electricity grids and universal broadband. Again, a unified Congress will be a big support to turning these plans into reality.

In terms of foreign policy, a Biden presidency will mark a return to more normal relationships with both allies and foes. Biden is known for a tough stance against China, but his administration will likely seek international cooperation in advancing US and global interests. It will be an end to Trump’s tendency to go-it-alone and emphasizing “America First.” But even under a Biden presidency, the US and China will continue to decouple.

The newly elected president will take over on 20 January for a four-year term. We continue to expect periods of market volatility and uncertainty, related not just to politics but also to coronavirus infections, regional lockdowns and the news flow related to vaccines. It remains a time for caution, but the situation is also clearly improving. Positive economic growth is expected for both the eurozone (3.6%) and the US (3.4%) in 2021, likely beginning in the second quarter.

For the time being, we continue to recommend a slight underweight position in equities. In terms of regions, we continue to prefer the US. The Federal Reserve is providing unprecedented support and the US Congress will eventually agree on further stimulus, creating a supportive environment for US stocks. This is all occurring against a backdrop of very low interest rates, which are not expected to be raised in the US until 2023. The government stimulus will help consumers and businesses weather lockdowns and unemployment. A Biden presidency and a more normal approach to foreign policy and trade could also provide support to European markets.

We prefer the health care sector, where vaccine efforts have increased positive sentiment, and are negative on the financials sector, which will continue to struggle with low interest rates and loan losses as a result of rising defaults. The financials sector and the IT sector (with regard to IT, we moved from overweight to neutral last month) could also be targeted for more regulation by the Biden administration.

Thematic investing related to energy storage, renewable energy and new energy technologies are all positioned to get a boost from the Biden administration’s Green New Deal. We also expect that global companies with competitive market positions will be able to absorb or pass on to their clients the costs related to higher US taxes.

We are in the closing quarter of a surprising and tumultuous year. The US elections have been a point of speculation for many months. As we finally near the election outcome, we are reassured that a Biden presidency should not upset markets; and a blue wave could actually introduce a less uncertain environment for investors. We are also nearing the time when a vaccine will be available, and 2021 will be a better year based on that alone.

Richard de Groot
Head Global Investment Centre
ABN AMRO MeesPierson

_{For more information, read "Likely Democrat win in November, could herald big policy changes", by Billl Diviney, Senior Economist, published by ABN AMRO Group Economics, 30 September 2020.}