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US election: the king is dead, long live the king!

Rebecca Cretney flags the impact a Biden presidency might have on investors based on the policies set out during the campaign, once the Senate race is decided.

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Published 9 November
6½ mins

Although the results ended up being much closer than predicted by the polls, we now enter into the Joe Biden and Kamala Harris era. Joe Biden is the oldest president the US has ever had. So readers should bear in mind the possibility of a Kamala Harris administration, or at least that she will play a far more active role than most vice presidents would.

And while the race for control of the Senate has now been pushed out until after the 5 January runoff in Georgia, what can we expect from a Biden presidency? And, more importantly for our clients, what impact will this change of presidency in what is the largest market in the world have on our portfolios? We pulled together some of our thoughts.

1. Higher corporate taxes and increased regulation

It is no secrecy that Joe Biden plans to increase taxation. He plans to raise the corporate tax rate from 21% to 28%, although this remains lower than the 2016 rate. Additionally, a minimum tax rate of 15% on book income will be applied and tax on overseas profits would also be raised to 21% (from 10.5%).

 

Clearly, higher taxes and increased regulation impact corporate profitability. In fact, a recent survey by the National Federation of Independent Business highlighted these two factors as the weightiest issues for smaller firms.

 

By contrast, larger corporates have substantial resources to absorb these increased costs. Indeed, many larger corporates have been using excess capital attributable, in part to the tax cuts introduced by the Trump administration, to buy back their own shares.

 

Our portfolios are underweight US corporates, in particular mid and small capitalisation stocks, with the largest holdings being the larger corporations who enjoy ample resources to absorb higher taxes and regulatory costs.

2. An increase in personal tax

The US currently has seven federal income tax brackets, with tiered rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. Biden plans on increasing that top rate of tax to 39.6%, affecting those earning more than US$400,000 a year. Long-term capital gains will also be taxes at 39.6% on income above US$1 million. Meanwhile, Biden is also looking to effectively lower taxes for the middle class by giving them refundable credits to cover existing costs such as healthcare, first homes and childcare.

 

However, this (and his progression on his corporation tax and regulatory measures), would struggle to proceed if the Republicans retain control of the Senate.

 

Any measures seen as curtailing future personal spending – despite only taxing the richest in US society – should be offset in the short term by the much-vaunted second pandemic stimulus coming through (hopefully) by the end of the year. Although arguments remain as to the size of the package, it is indicated that it includes US$1,200 stimulus cheques, unemployment benefits, small business aid, as well as state and local funding.

3. Less tweets, more diplomacy

It is a mistake to believe that Biden will be sympathetic to China. He will not. He will continue to protect US interests, but he is a seasoned diplomat. He will enforce the existing trade laws, but work with his allies to achieve his goals. We will also see fewer surprises on Twitter.

 

In our recent webinar, we discussed how China/US trade has recently fallen off a cliff. Under this Biden administration, US companies which previously did business in China might be tempted to dip their toe back into the market and vice versa, i.e. Chinese companies with operations in the US might also be lured back in. This is good for world equities given the China/US relationship is vital, with China accounting for a third of global gross domestic product.

 

Overall, Biden is seen as the better candidate for global stocks (versus US stocks) and our portfolios are underweight US equities to reflect the relatively better outcomes possible under this administration. The reason for our underweight US equity position was not, however, based on our predictions of the results of the election. Instead, from a valuation standpoint, US equities were and still are expensive.

4. Cleaner skies

Biden’s plans include moving to 100% clean energy by 2050 and re-joining the Paris Climate Accord club that the US left on 4 November. Additionally, he plans on spending a staggering US$1.3 trillion on infrastructure, much of which is green infrastructure. Our portfolios have a strong bias to alternative energy and infrastructure and are, therefore, well positioned to capture this upside potential. While Republican will baulk at this level of spending should they retain the Senate, the appointment of a new “climate czar” would also bring considerable focus on the benefits of a greener country.

5. Open doors

Biden’s plans on immigration, ending family separations and creating a path to citizenship, are a general long-term positive to US markets given the US was pretty much at full employment prior to the COVID-19 outbreak. And although jobs have been lost in 2020 due to the pandemic, Friday 6 November saw a fall to a 6.9% jobless rate. This and recent evidence of overall economic growth suggest the US economy is experiencing a good recovery. While the pandemic’s impact on economic activity will continue as Biden’s plans to contain COVID-19 are rolled out, this boost to human capital would not be an immediate positive. Instead, it is a slow burner to bring benefits when valuations in the US become more attractive.

6. Better equality

The gap between the über wealthy and the poorest in America (and across the world) has been widening. Under Biden, those with the lowest income would have more money in their back pockets, as he plans on raising the minimum wage to US$15 per hour (up from US$7.25) across the States – a move likely to be welcomed beyond Florida, which already voted on 3 November to raise the minimum wage to this level by 2026. While this represents a greater financial burden for corporates, it is inflationary (which is a good thing in today’s environment) and creates another long-term positive.

7. An increase in US debt

The Committee for a Responsible Federal Budget has concluded Biden will increase US federal debt by US$5.60 trillion. Because he is doing this through outright spending, this is reflationary (i.e. helps the economy expand), by putting more money in the pockets of consumers. While long term, Biden’s plans are stimulating for overall activity, again the approval of the Senate is crucial for these plans to be realised.

In summary, under Biden, the US economy should benefit from more government (fiscal) stimulus in 2021, although financial markets would have to adjust for the shock to US corporate earnings brought about by higher taxes and increased regulation.

Trump would have been the better candidate for financials, healthcare and traditional energy stocks. Under Biden, the companies that stand to benefit are those involved in renewable energy, infrastructure and those with overseas activities. International markets will also benefit from greater diplomacy.

US government bond yields should rise on the generally reflationary agenda, although this upwards drift would be curtailed during the expected fiscal battles between the Democratic president and Republican senators. The first such clash is expected to start soon given the run-off in Georgia means the Democrats have two fewer seats that the Republicans. We believe treasuries would remain supported until financial market pressures force a Senate compromise with the new president sometime in H1 2021.

Although market volatility may increase in the short-term, particularly as Donald Trump pushes his agenda of election fraud and court cases, this is nothing new for investors in 2020 and could even present us with a fresh opportunity to increase our equity exposure. Another opportunity could come given the greater costs to companies associated with higher taxes and regulation, despite the bigger headwind of the decoupling of the US and China being marginally mitigated in Biden.

While the short-term noise plays out, we continue to keep an eye on the long term outcomes for clients, and are well positioned to capture opportunity. And, as the world takes a step back from constantly refreshing their news and social media feeds, we remain focused on the important economic and financial announcements to ensure client portfolios stand to benefit.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help their finances, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.

 

She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.

 

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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