Democrats & Republicans: Two pathways, one destination for markets

Biden has campaigned on a 7 trillion-dollar fiscal agenda with the big-ticket items comprising education, infrastructure/decarbonisation and healthcare spending.

Aggressive income and investment stimulus is positive for economic growth. In that backdrop real rates can rise from record low levels, particularly with the additional pressure of funding the enormous fiscal deficit in the US, and the dollar would potentially weaken over the longer-term.

In global portfolios this favours high-quality cyclicals that have been ignored by the market, particularly stocks that benefit from infrastructure spending like 5G and decarbonisation plays. 

In decarbonisation this accelerates the emerging super cycle we’ve been discussing for some time - suddenly you have the three biggest regions – Europe, China and the US - embarking on long-term decarbonisation plans. This could lead to a switch from a ‘virtual’ to a real asset investment cycle. Volkswagen and  EDF (Électricité de France)  are examples of beneficiaries.

An environment of super-charged fiscal stimulus and higher rates is also likely to be beneficial to financials – which are valued at incredibly attractive multiples in both an absolute and relative sense – as higher rates take some of the pressure off net interest margins and stimulus likely buffers overall credit costs in the economy.

You have to consider how the Democrats’ aggressive spending plans will be funded. 

Biden is proposing lifting taxes to cover almost half of the spending, but there will still be a net 2 trillion addition to the fiscal deficit, from today’s 4 trillion dollars. 

This will mean greater taxes on the corporates and the wealthy, a negative for domestic US businesses. And there’s the potential for a less friendly policy environment for big tech and pharmaceutical companies.

Much has been said about what might happen if the Democrats win enough Senate seats to remove the filibuster (essentially a tactic used in the Senate to obstruct and delay legislative change). This would open the door to reform and could further embolden the agenda. 

Removing the filibuster rule is extreme. It’s not out of the question, but remember the Republicans and Democrats have previously controlled both the House and the Senate and haven’t removed the filibuster for legislation.

There is also the possibility of Biden winning and the Republicans maintaining control of the Senate. The Democrats would have a difficult time  passing legislation and progressing  their  fiscal policy agenda. 

There would still be fiscal stimulus, but it may be more muted as each stimulus package would have to be a negotiation between the Republicans in the Senate and Democrats in the House.

The Republican path 

The final destination

In a situation where Biden wins and the Democrats take control of the Senate we will simply see  more aggressive  fiscal stimulus and accelerated regime change in market leadership – one where value, or lower multiple stocks, lead the market. 

We still see this regime change emerging under a Republican president, albeit at a slower pace. 

Stimulus is likely to be further amplified by COVID-19 vaccine success, which is ultimately far more important to the long-term direction of markets than the election. Our discussion with leading vaccine expert, Dr Michael Farzan regarding vaccine development issues and the likelihood of success can be found in this recent wire.