US election impact on investors

From

Phillip Naylor

With the US Presidential election just seven weeks away, Frontier Advisors has undertaken a ‘virtual’ trip to the US to meet with several investors, think-tanks, academics and pundits to discuss how investors should be thinking about portfolios heading into this event. They have teamed these insights with analysis of market responses to past elections to help inform possible outcomes for investors.

Frontier’s analysis notes that while the Presidential election is as much about ideology as it is policy, there are some key areas investors should take note of.

A high profile aspect of Biden’s fiscal policy, compared to Trump, is a proposal to reverse part of Trump’s corporate tax cuts, lifting the rate to 28% from 21%. While this is often used as an argument for why stocks may do worse under a Biden win, Frontier thinks the expected additional $4 trillion raised in revenue over ten years, and Biden’s resultant spending policies, including heavy infrastructure investment, could bode well for risk sentiment at a time when the economy is facing a large economic contraction.

Principal Consultant Phillip Naylor adds that “although the corporate tax rate is high profile, corporate taxes do not make up a large proportion of total US Federal Government revenue. Given the importance of the Senate election outcome, Biden may have difficulty passing a full increase in the corporate tax rate but may find it easier to pass his spending plans”.

Based on their discussions, Frontier is forecasting that China trade tensions are expected to remain regardless of who wins the election. Public opinion in the US toward China is increasingly unfavourable across party lines meaning both candidates are likely to take a hard line approach.

Analysis of market responses following elections over recent years has not convinced Frontier of any conclusive impact on asset prices driven by the election cycle. Naylor states that “long-term investors should look past election results delivering predictable market responses based on the 2 party assuming power, but rather focus on policy differences and underlying economic conditions at the time of the election.”

Frontier’s view however is that this does not mean Presidential elections, should be ignored. Their paper states that understanding the context of policy differences is important in understanding an ever-shifting macroeconomic landscape. The rise in populism and increase in anti-China sentiment is likely to lead to an ongoing fractious relationship between the US and China and trade tensions are unlikely to disappear. A move towards a less globalised trading world is one of several key secular Themes Frontier thinks investors need to be thinking about and this election result could be a major influencer on the speed of that evolution.

Although the consensus view of those on the ground that Frontier spoke to favours a Biden victory, it is worth noting a similar “Democrat sentiment” existed this close to the first Tuesday in November in 2016. What is also unclear is the process if the outcome is uncertain on election night, and how long a dispute may take to resolve.

Read the report.

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