How will the US election impact Australian investors?
The dominance of the U.S. over global markets has long meant that its Federal Elections also influence investment activity on an international scale. The 2016 results may have caused global surprise and changed the political sphere, but will the 2020 election cause similar upset?
I spoke to Timothy Rocks, CIO for Evans and Partners, and David Lane, Director and Senior Adviser for Pitcher Partners about the upcoming U.S. election and how it will impact Australian investors.
Market activity and US election results
Traditionally, the lead-up to and the period immediately following a U.S. election can cause some uncertainty in markets.
This year has been a bit different.
Mr Lane says, “when you historically look at markets reacting to U.S. elections, in most periods you actually find that the volatility of markets increases for the three months prior to the election. That hasn't actually been the case this year. We had so much volatility earlier in the year that last few months have been relatively modest in terms of volatility. So, you know, we can't necessarily always predict what's going to happen based on history, when history isn't necessarily repeating itself.”
There are still some predictions to be made based on traditional views of parties as well as the policies each party has announced.
Mr Lane says, “if Biden gets in and there is a blue wave*, there’s the potential that we could see a bit of a market sell-off on the basis that historically Democrats have not been as positive for equity markets. A number of the policies that Biden has is to increase company taxes and potentially have greater spending on healthcare.”
On the reverse though, he notes that there is some suggestion that any COVID-related stimulus package offered by the Democrats could be larger than any offered by the Republicans which could actually be a positive for equity markets.
As a whole, Mr Lane says, “I do think that the underlying economic environment, and COVID probably has a bigger impact on the outlook for markets than the actual result of the election itself.”
Mr Rocks agrees but also underlines that the circumstances are far from normal.
He says, “you could certainly argue that a Biden presidency would be a return to predictability in policy and general relations. I certainly agree that the blue sweep has the potential to give it more stimulus, not just in the short term, but also over the full administration if he enacts a lot of his infrastructures type sort of plans.”
A Biden presidency could also play into one of the global themes, growth in Asian markets.
Mr Lane says, “one of the geographies that we're looking at from an investment perspective is more Asia and moving money more into Asia on the basis that the Asian economies have come out of COVID quite well, compared to the rest of the world. And potentially if we do have a Biden victory, they may well be, or he may well be more amenable to negotiating a trade with China and the rest of Asia. So, you know, we could see a bit of a positive skew towards Asia into the future.”
Predicting the outcome
The polls to date have indicated that the Democrats, led by Joe Biden, are likely to have the lead. Whether the data can be trusted is a different question. The polls in 2016 predicted a decisive win to the Democrats under Hillary Clinton and were wrong but Mr Rocks believes analysis has been done to correct the problems of the past.
Mr Rocks says, “the pollsters all determined that the real problem was that they were talking to not enough of the right people. In other words, that education plays a big role in voter preference, and that whether you live in a city, suburbs, or rural area played a big role. And so, they were underestimating those key demographics when they were talking to people, so they've made those adjustments now. They tried those new models out in the 2018 midterm elections, and they seem to work pretty well.”
He views voter turnout as being the bigger uncertainty this year, citing a combination of greater interest as well as improved access to voting.
“Previously there were significant constraints on pre-election day voting, on absentee voting, on mail-in voting, and now all states have allowed some combination of those and made it much, much easier. So as a result, you've seen this thing that 25% of people have already voted at this stage, two weeks out. That could be 50% or more, the way things are going,” says Mr Rocks.
Positioning a portfolio during the US election
Both Mr Lane and Mr Rocks believe that investors should hold to their long-term strategy, but the environment may open some opportunities for tactical movement.
“I think this genuinely is a time that we should be defensive in our portfolios. I think we are more uncertain about the 3-5 year story for markets than we've ever been. You know, health crisis, what happens with vaccine, the macro. So, absolutely this is a time where you should maintain healthy levels of defensive assets, including cash and gold,” says Mr Rocks.
From a tactical perspective, both see healthcare as potentially benefitting from a Democrat victory.
“Healthcare is that the one sector that will probably have the biggest impact. It is a sector that strangely enough has probably underperformed over the last six months in spite of everything that's been going on around the world, and the general increase in government spending towards healthcare. We still see overall the sector as being good value, but there's the potential of a short-term impact,” says Mr Lane.
According to Mr Rocks, banking and finance may also be a sector to watch as the Democratic platform has traditionally been focused in favour of regulation, with the Republicans in favour of deregulation, though neither party has promised anything either way. The technology sector may also be in the spotlight in coming months.
“There's lots of discussion about whether the big tech titans will be subject to increase privacy rules or antitrust campaigns. But having said that it's not clear whether the Democrats or the Republicans will be worse on that. In fact, the Republicans just announced an antitrust campaign, a suit against Google just last night. So the tech sector is probably in focus, regardless of the result, though.”
An eye to the future?
For both Mr Lane and Mr Rocks, the U.S. Election is something to monitor for Australian investors, but not necessarily something of particular concern.
“The outcome will have some impact, but given what we've experienced over the last 12 months, there are so many other issues at play that really the U.S. election is only one of the many things that we need to be keeping an eye on,” says Mr Lane.
Following in this vein, Mr Rocks says, “we really don't know how severe the health crisis will be, how long dated it will be, how successful vaccines will be, whether the macro environment will be able to continue to be relatively resilient to it. What will policy makers do? All these things are much more fundamental questions, when we think about how equity markets will perform over the next sort of three to five years.”
*A blue wave refers to Democrats holding majority in both houses of parliament
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