Summary

Peter gave us a very insightful presentation on the upcoming US election. Getting a vaccine or a widespread testing programme is a number one priority for both candidates. On the federal budget both candidates would be willing to spend whatever it takes to engineer an economic recovery. Clearly they differ in many other areas. On tax, Biden has called for corporate and personal tax to be raised whilst Trump has been cutting taxes. Trump has been deregulating aggressively for the past four years which the markets and corporates, particularly in Tech, have enjoyed. Biden is proposing reregulating picking up from where the Obama Administration had left off. In terms of sectors, Biden favours alternative energy whilst Trump favours fossil fuels. On Healthcare, which is 20% of US economy and the second largest sector the two candidates also have diametrically opposing views whilst Biden wants to expand the Affordable Care Act, Trump has advocated overturning it. In terms of the Financial sector, Biden wants to regulate parts of it whilst Trump continues to deregulate. On Technology, Trump and Biden both realise how important the US companies are to keep their weakening position as world leader and try and keep China in check. Overall, Peter says that its Biden’s race to lose and if Trump wins it will be very close and likely contested. Biden could win big based on polling. A delayed and disputed election is not just possible but probable. There is sadly a chance of protest and perhaps even violence; odds put at 20%. Peter actually believes this is more likely with a Trump victory from Biden supporters. Worth noting that incumbency favours the current president and status quo. In the modern era only 5 out of 15 haven’t been re-elected. Peter believes that Trump will outpoll his approval rating in many states. This is a vote of continuity or disruption. Markets like continuation that would favour Trump who has provided personal and corporate tax cuts and deregulation. On the flipside Trump is unpredictable; his policies are often reactive rather than strategic. Meanwhile Biden represents change; whilst he is conventionally less market friendly than Trump he is perceived to be more predictable and an institutionalist. He comes from Washington and understands the system and as a result policy will be more predictable and potentially more effective. Whilst Biden’s number one priority will be the economic recovery he will be a lot less sensitive to the equity markets. Should he be the victor, expect taxes to go up significantly and he is advocating some pretty big spending packages. Biden will want to re-establish and strengthen relationships with European allies; he will re-engage with the WTO and WHO. He will want to bring back multilateralism as a core element of US foreign policy. Biden views himself as a placeholder; he is 77 after all and is looking to provide a bridge to another democratic candidate in four years’ time. If Trump wins he will be more aggressive both in terms of domestic and foreign policy. Expect escalating trade tensions with China, new tariffs and aggressive trade policy with European countries, Japan etc. The US will move to a greater period of isolation. He will obviously be constrained if the Republicans lose the Senate. Who wins Congress will matter a lot. There are two myths, first that a split government is good for equities and second that the equity market does better with Republicans in power. Peter suspects that if Biden wins the presidency then there is a very good chance that the Democrats will win the Senate. The reason that Trump won the last election was that it was immediately after an economic manufacturing recession where the US industrial heartland states - Pennsylvania, Wisconsin and Michigan - saw massive job losses and voted for change. We need to focus on the swing states to determine who will be the victor this time round, most importantly Florida and Pennsylvania - these two states are likely to determine the outcome for the election. If there is a very small margin of victory say one point the whole world will shudder because everything is up for grabs. Its easily plausible that there is a repeat of 2016 where Trump wins the electoral vote but loses the popular vote - he lost by 3 million in 2016, it could be 5 million this time! The worst scenario would be a tie which would be an extraordinarily difficult path to navigate; it may have to go to Congress or the Supreme Court, as in 2000. We are very likely to see a delayed result. It could easily be Friday or longer, potentially lasting several weeks which would be very turbulent for markets. MRB expects US economy to expand at a moderate pace next year which is predicated on the notion that a vaccine will be available which they believe will be mid-year at the latest. An upbeat case for equities is that earnings recover to 2019 levels by end of next year. However, stocks are expensive by historical standards and would suggest middling returns throughout 2021. A good recovery seems to already be priced in to the equity markets. Corporate credit is more attractive than government bonds but is still pretty expensive.

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