Three policy differences to watch in the US presidential race

September 22, 2020 08:10
Democratic U.S. presidential nominee and former Vice President Joe Biden plans to invest heavily in areas like renewable energy and climate protection. Photo: Reuters

As the 3 November US presidential election draws closer, the race is tightening between President Trump and former Vice President Biden. Mr Trump and Mr Biden have notably different views about corporate taxes, energy and US-China trade policies, which may have a substantial impact on markets and portfolios. While much is at stake in this election cycle, the three policy areas noted below could have a large impact on the markets and portfolio allocations. Investors may plan to adjust portfolios depending on the direction of policy after election day – though emerging technology and infrastructure may be winners regardless of the outcome.

Corporate tax policy: while Mr Trump’s corporate tax policies are ostensibly more market-friendly, Mr Biden’s plan may be offset by other growth initiatives

Mr Biden wants to reverse the Trump administration’s 2017 tax cuts, raising the corporate tax rate from 21% to 28% (while keeping it below the pre-2017 rate of 35%) and creating a minimum 15% tax for corporations earning USD 100 million or more. He also plans to double the tax rate for foreign subsidiaries of US firms. These policies would likely hurt earnings for sectors that benefited the most from Mr Trump’s tax cuts (including financials, consumer staples and utilities) as well as large multinational companies with overseas operations. However, Mr Biden does plan to invest in growth areas such as clean energy and 5G technology. Moreover, the US economy is recovering from recession, so Mr Biden may not make tax hikes an immediate priority – and there is no guarantee they will pass, especially if Congress remains divided.

Mr Trump wants to maintain the status quo. The corporate tax cuts he implemented in 2017 were designed to be permanent, and he also likely wants to turn the temporary tax cuts for individuals into permanent ones. However, much depends on which party controls the US Congress after the elections – a Democratic Congress would be much less receptive to Mr Trump’s tax proposals.

Energy policy: a Biden presidency could create opportunities for clean energy, while another Trump term would support the existing energy regime

Mr Biden plans to invest heavily in areas like renewable energy and climate protection. His policy calls for a USD 2 trillion investment in solar, wind and other clean-energy sources, as well as incentives for manufacturers to produce zero-emission electric vehicles and energy-efficient homes.

Mr Trump’s plan focuses more on traditional energy sources such as oil, natural gas and coal – which account for over 80% of total energy used in the US (vs 10% for renewable energy). He would provide a friendlier tax and regulatory regime for traditional energy, as well as continued support for “fracking” – a drilling technique use to extract oil or natural gas from underground. The Trump administration believes its energy policies have made the US less vulnerable to shocks from the Middle East or OPEC.

US-China trade policy: both candidates would be “tough on China” and aim to strengthen US tech leadership over China

President Trump has made US-China trade a priority of his administration – often acting unilaterally or via executive order. The two countries did agree on a Phase 1 trade deal on 15 January, but tensions have since resumed over the pandemic and the business practices of Chinese technology firms. In a second term, Mr Trump would likely continue his tough rhetoric and uniliteral approach, perhaps spurring market volatility in the years ahead.

Mr Biden has also pledged to be “tough on China” but has indicated he prefers building coalitions – bringing US allies, labour groups and environmental organisations to the negotiating table. His administration would likely also view Chinese-led technology firms less favourably; Mr Biden proposes a USD 300 billion investment in US technology spending (including 5G, AI and cybersecurity) to remain competitive with the Chinese. President Trump would likely favour continued US leadership in technology as well, although he has not confirmed any new policy measures to support this.

Despite their many differences, Mr Biden and Mr Trump are aligned in some areas that markets may not appreciate. For example, both candidates support some form of lowering pharmaceutical drug prices. Both also favour more regulation of – and have even called for breaking up – certain large US tech firms. And both hope to pass substantial US infrastructure packages, supporting areas like smart cities, roads and airports – though Mr Biden also supports developing clean-energy infrastructure.

The global pandemic is the big wild card in this election year

Historically, markets have done worse in the weeks before election day than in the period from election day to year-end. This is likely because the markets don’t like uncertainty: once an election is over, the markets are able to start factoring in the next president’s policies.

At the same time, the global Covid-19 pandemic makes this a very unusual election year for the markets. While the presidential candidates spar over how they would approach the pandemic, the markets are processing new data points about regional outbreaks, vaccines, drug therapies and the pace of economic recovery – in addition to the level of monetary and fiscal support that has provided a floor for markets so far.

If the global economy does rebound in the next 12-18 months, we expect to see broader sector and geographical participation in the market’s upside – beyond the large-cap US technology stocks that have led through the crisis. Investors may want to factor this in, along with the candidates’ proposals, to consider allocations to select sectors. Cyclicals (such as select industrials, energy and financials), emerging technology with long-term growth potential (such as 5G, AI and cybersecurity), infrastructure and clean energy may all be potential winners in a post-2020 US election era.

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U.S. Investment Strategist, Allianz Global Investors