Trump v. Biden

 

^{This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.}

 

Two of our analysts debate who will win the US election and what that means for markets…

 

 

Biden will win | Thomas McMahon

 

In my opinion President Trump won’t be able to overcome the impact of his handling of the pandemic, and the election is a foregone conclusion. Trump has had his periods of relative popularity, and the main thing driving it has been the economy.

Many Americans have been willing to support the man if he can deliver growth and jobs. But I think it is – at best – a vocal minority who will support him if these evaporate.

The markets are riding high at the time of writing, creating a feel-good factor of sorts, but who knows if this will even be the case at the time of publication?

There are signs of a market top and the economic fundamentals are diabolical; these factors are going to weigh more and more heavily on investors’ and voters’ minds.

A rising US stock market creates a wealth effect, as the average US saver sees their retirement plan grow in value. There are signs, however, that all is not well with this bull market.

Although the S&P 500 hit all-time highs last week – meaning it has risen in price since before the coronavirus hit – this is entirely due to six stocks. If it wasn’t for Facebook, Apple, Alphabet, Amazon, Netflix and Microsoft, the S&P 500 would have been down for the year.

As of 20 August these stocks were up 43% on average and the rest of the market down 4%. Furthermore the index has decoupled from fundamentals quite decisively: GAAP earnings (those calculated with generally accepted accounting principles rather than bespoke metrics some companies use to flatter their performance) are down around 12% since the crisis hit, while the market is more expensive.

The P/E ratio was 26.4 just before the crash and is now at 28 times. Additionally it may seem churlish to point out that the Bank of America fund manager survey is only now turning bullish, suggesting that the investors who missed the sharp rally from March are now getting in.

Earnings are an early indication of the real economy feeling the effect of the government shutdowns. Various government support schemes will roll off over the coming months, leaving thousands upon thousands of Americans poorer.

The COVID-19 Eviction Defense (or CED) Project, based in Colorado, estimates 29 million Americans in 13 million households are in danger of eviction this year – although admittedly the CED Project is not impartial.

The contrast between their fate and the growing wealth of the richest as the market rallies is not a great backdrop for an incumbent. In fact Trump’s best chance of winning might be if the state economies in democrat strongholds, such as California and Michigan, are so dire that registered democrats turn against their party.

This scenario is not impossible to be fair, as California, the world’s fifth largest economy and the home of Kamala Harris, cannot even run a functioning power grid.

If I am right, what are the investment implications of a Biden / Harris / Clinton victory? Biden is a frontman for the Democratic establishment.

Having seen off the alarming Bernie the democrats hope to see off the oafish outsider Trump. Consequently we should expect a return to establishment politics and establishment concerns.

Environmentalism should get a shot in the arm, and Biden’s plotted infrastructure spending includes heavy investment here – with incentives planned to encourage Americans to switch to energy efficient products.

This plan should benefit funds which have exposure to companies operating in this sphere such as Impax Environmental Markets.

Healthcare reform may also be back on the agenda. Biden has plans to add a new publicly funded insurance plan and expand coverage at the federal level.

It is notable that the complaints about drug pricing have stopped, although vague threats are being made about too much concentration in the healthcare industry.

The reform plan and the desire to be seen to tackle the coronavirus better than Trump are likely to lead to increased spending on healthcare; which will consequently provide opportunities for active stock pickers in healthcare and drug development such as International Biotechnology Trust.

Overall, though, it is hard to see a Biden victory as positive for US stocks. His proposals to increase tax on the profits US companies book through foreign subsidiaries is likely to hit the big six, Apple and Amazon in particular.

Increases to corporation tax will dampen profits across the board, and they could well be due a cyclical correction anyway from elevated levels.

Furthermore whoever wins in November will, unfortunately, inherit a country dealing with a horrendous recession, the tail end of a pandemic – as well as rioting and disorder across numerous cities. As in the UK, expectations of government support have been raised to new levels just as government’s ability to pay is degrading.

Biden might be more accommodative to China, however, which could be positive for Asia investment trusts.

It would be particularly beneficial if he were to revisit the Holding Foreign Companies Accountable Act, which icould see a wave of Chinese companies delist from US exchanges.

After such a strong period of outperformance a Biden victory might be a good time to rotate away from the US, with Asian trusts with significant China holdings, such as Asia Dragon, as potential beneficiaries.

 

Trump will win | Callum Stokeld

 

“Keep on rockin’ in the free world” Neil Young, 1989

 

There was a reason that Americans flocked towards Sanders and Trump in 2016. I think the average American sensed that they had been cheated, that something wasn’t right with the system and something had gone wrong.

Monopolies and monopsonies, situations where single sellers or buyers dominate an industry, had come to dominate the US corporate landscape, and labour’s share of the national income had decreased. Both Trump and Sanders served as outlets for the lived experience of citizens that something wasn’t right.

Four years on and nothing has changed. There is academic evidence which suggests that spending on lobbying is the most effective use of capital a large American firm can use, and that the introduction of regulations tends to increase economic moats already enjoyed by the largest firms in a sector.

Critics will rightly point out that Trump has done nothing to change this. Indeed deficit financing a cut in corporation tax, when aggregated margins and free cash flows were already at extended levels relative to history probably exacerbated it.

But who cares? It is all about the framing. US citizens are not happy with the ‘establishment’. Trump can frame the election as him continuing the fight against the establishment.

In their infinite wisdom, the Democratic party coalesced behind their most establishment figure in the running, and then selected a deeply establishment figure from a safe Democratic state as his VP.

Polls in swing states, such as Texas, show voters prefer Sanders to Biden in a match up vs Trump. Think about that. Voters, given the option, prefer an ‘anti-establishment’ candidate to a quintessential DC one.

We should expect Trump’s campaign to play heavily on this, and expect this to be a particular target for him during the presidential candidates debates.

Where Biden has gone off the script which has dominated the last 20-30 years of US mainstream politics, it has been to demonstrate ambiguity on positions such as ‘defunding the police’, which simply do not play well with swing voters.

Still, at least the Democrats can roll out a series of celebrity endorsements – that played well in 2016 didn’t it? Unemployed voters in Ohio love being told by Hollywood millionaires that the key issues in the US are around social justice, and not around building an economic future for themselves and their children.

Meanwhile the Chinese state has just placed its two largest ever orders for US agricultural goods, as a result of the devastating floods in the Yangtze basin. It may be a stretch to claim credit for the weather, but expect the

Trump campaign to frame this as them ‘winning’ vs China. The fact that individual farmers probably won’t see any benefit – which will be enjoyed by the shareholders in the highly concentrated US agricultural industry’s big players – will likely just convince this important voting constituency that there are problems with the system.

What does this mean for investors? Excuse my cynicism, but it doesn’t mean a damn thing. That is our lived experience of the past four years.

Whoever wins the presidential election will matter very little. The court system and the mid-terms will matter far more. Anti-trust is the watchword for US political economy matters, and neither candidate shows an inclination to challenge the existing jurisprudential interpretations.

In regard to the mid-terms, a Trump victory will actually likely preserve the status quo in both Congress and the Senate a bit longer. Whereas a Biden victory likely provokes an anti-establishment backlash in the mid-terms.

Thus, for now, you might do better owning existing winners and US large caps. The recent pandemic probably offers a chance for them to expand market share even further.

This situation in my view probably means the denouement of this trend will likely be an even more violent rotation, but that may remain some way off and in the meantime investors who aren’t afraid of that prospect can access the sector through funds including Allianz Technology Trust, Polar Capital Technology, or Manchester & London trust.

A Trump win should definitely be negative for Chinese technology investments. The zeitgeist is set for this eventuality, whatever the outcome, but markets could hold out greater hopes for a rapprochement under Biden.

China is not ready to cope without Western capital: GDP per capita in China is still very much at a developing economy stage, at around $10k per annum.

Germany is the obvious location, given the pliability of the German state. Again this approach feeds into the ‘buy existing winners’ narrative; Germany probably benefits, widening the gap between it and the rest of the Eurozone.

Above all as an actionable point, a Trump administration is likely to remain slightly unpredictable – in its rhetoric at a minimum.

Market volatility in all financial assets is likely to remain elevated with sudden spikes. BH Macro and BH Global provide optionality on this volatility: they may not capture huge upside in every spike, but they have a framework which gives them the opportunity to do so.

It might be profitable to own some commodities too. I think we may well be moving into a period of consolidation/retrenchment for this sector.

But if supply chain reshoring proceeds, it requires infrastructure. Funds with exposure to mining companies such as BlackRock World Mining remains well placed in this regard.

 

 

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