Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Can Trump pull a Bradbury?
Before last week’s positive COVID-19 test, there was little doubt President Trump was on the comeback trail. Amid signs of an economic recovery, positivity around hopes for a vaccine, and progress on another fiscal stimulus package, all was looking up for a second term. Then came the ‘Presidential Debate,’ in which Trump brought Democratic candidate Joe Biden down to his own level in what was effectively a street fight. As the many memes flying around social media joked, are these the best two candidates that a current of 300 million can deliver?
In investment markets we have a tendency towards hyperbole. The concept that there are binary implications for such complex events may bring us comfort, but history has shown it simply isn’t accurate. 2016 is a perfect case in point. Media and investment markets were rife with doomsday scenarios exclaiming that a Trump win would be the end of the world for the US economy, suggesting stockpiling gold and selling equities. It couldn’t have been more wrong. Despite President Trump’s unconventional approach, his policies were effectively down Republican Party lines. Will it be the same in 2020?
Global macroeconomic analytics firm BCA Research recently published a detailed paper looking at the real impacts of a Biden or Trump victory. The Cliff’s Notes version: both will be reflationary and a positive for the US economy. But it isn’t that simple, the complexities of the US system mean the President, who ultimately controls foreign policy, can be from a different party to those who control the Senate, where laws are made.
In its paper, BCA highlights that there are powerful events occurring outside the White House that are just as (if not more) important in the outlook for investment markets. The Federal Reserve’s recent decision to shelve its inflation target in preference for full employment, stands out as an inflationary event. The continued fiscal largesse of the US Government, combined with a more protectionist stance and the almost bipartisan need to counter China, will remain key issues in the weeks to come.
Starting with the commonalities, both Trump and Biden have promised a boom in infrastructure spending and a focus on re-energising the manufacturing sector that has seen millions of jobs sent overseas. The difference is that Trump is seeking to do this through tariffs, Biden through a proposed Carbon Border Tax, that would punish those not meeting their climate and emission objectives (China anyone?). Winner: Tie.
The result is that fiscal largesse is a given. The difficulty will no doubt fall from its ‘extreme highs’ according to BCA, but for different reasons. Both parties are well aware that if Government spending falls faster than private activity recovers, they will be governing over another likely extended recession and potentially a depression. The result, is another US$2 trillion ($2.8 trillion) in additional spending from a Democrat win, compared to a second Republican term. The difference, however, is that the Democrats would fund this through a series of tax increases, primarily focused on businesses. Despite suggestions that Biden was supportive of the big-tech sector, these tax increases would hit them the hardest. Trump would offer a double whammy, with his clear intent to disrupt the monopolies. Winner: Let’s call it a tie.
The risk of economic lockdowns remains higher under a Biden White House, following his statement that he would “follow the medical advice.” Yet BCA sees the bar for another national lockdown as being set quite high, particularly with state-based measures now in place. Winner: Biden on health, Trump on the economy.
Having considered the economic implications, and what will be the impact on sharemarkets. Well, it’s complicated. It really depends on whether a Trump win coincides with a Democratic senate or vice versa.
Let’s start with the worst case. Biden wins and the Democrats have a clean sweep. In this case, those increasingly popular value stocks will continue to underperform. Biden’s policies are heavily targeted at renewable and cleaner energy, placing huge pressure on the country’s massive oil and gas sector, increasing regulation and placing further stress on an already stretched sector. Healthcare companies would also be hit, with the US adopting policies more akin to Australia’s system, capping the price of pharmaceuticals and profits along with them.
The best case, Biden with a Republican senate would seem to deliver the best of both worlds. A slowdown in the exhausting trade war with China, a boom in spending but without many of the economies dragging tax increases that are being proposed. This would be reflationary, a positive result for the financial sector and a boom for the failing US infrastructure sector. The next best, a Trump win and a Democratic congress. This would reduce the Republican’s ability to pass further tariff increases but allow Trump to veto any laws that go against his free market mantra.
So, to conclude, a Trump or Biden win is not the end of the world that it has been made out to be. If the last twenty years has shown us anything, it is that businesses and economies do not stop due to elections, or even due to pandemics. Businesses and people adjust and in this environment there will be many winners and losers, but generally more of the former than the latter. To summarise the winners and losers:
- Trump wins – Great news for infrastructure, energy and healthcare companies, bad news for big technology and China exposed businesses.
- Biden wins – The ‘value’ companies will only get cheaper, energy among the worst hit. Tax cuts, if deliverable, will hurt profitability at the worst possible time, but infrastructure stimulus will be inflationary, benefitting the clean energy, utilities and financial sectors.
