Us Elections And Why It Matters To South African Investors.

The Money Market

Joe Biden And Donald Trump October 2020

Writing this article, we are a week away from the US elections. The Republican president, Donald Trump is being challenged by Democratic Party nominee Joe Biden, who is best known as Barack Obama’s vice-president, but has been in US politics since the 1970s.

As with any election, there has been a lot of speculation on which way the votes will swing. Only time will tell which way the American public decide to vote, but it is important from an investment perspective to consider the different outcomes and what it entails for South African investors. As far as America may be from South Africa in distance, what happens over the boarder does impact our South African economy. With America being one of the largest and most powerful economies of the world, they really do pull a heavy weight across global economies. 2020 has made us all witness to how the ‘way of doing’ can be permanently altered. The Covid-19 crisis has clearly created massive dislocations in the world economy, markets, policy and geopolitics. The election outcome, should be viewed in light of this backdrop.

Although this article is focused on the election results, we need to be cognisant of some secular changes taking place around us and these changes will in part also be affected by the November election results. Secular forces like; demographic trends, rapid advances in technology and a rise in savings since the Global Financial Crisis- all play part in the investment landscape going forward and should be closely followed and considered.

Biden VS Trump Election Predictions
Let’s start with what some of the experts consider. According to Norman Ornstein, a long-standing Washington Insider and member of the Editorial Advisory Board, he assigned 85% odds to a Biden win(Democrat) and 65% to Democrat taking the Senate.

An Investor’s Business Daily and TechnoMetrica Institute of Policy and Politics poll released late October also had Biden with a sizeable national lead over Trump, with the Democrat up 7 percentage points. Last week, a national poll from Quinnipiac University had Joe Biden up 10 percentage points.

“Biden seems poised to flip back three key states in the Rust Belt that Trump carried in 2016: Wisconsin, Michigan, and Pennsylvania. Biden’s average leads in those first two states are around 7-8%, while his edge is Pennsylvania is smaller, at about 5%,” said J. Miles Coleman at the University of Virginia’s Centre for Politics. “Compared to 2016, Biden has a larger a more consistent lead in national polling over Trump than Hillary Clinton did,” Coleman, at the University of Virginia, said. “Ever since June, Biden has had an 8-9 percentage point lead in national polling averages.”

COVID-19 and the Election
Pre COVID-19, most experts would have confidently said that Trump would win the elections because of many factors. The economy was doing extremely well, unemployment was at decade lows and stock markets were booming. However, the pandemic produced a massive self-inflicted wound for Trump. The public still gives Trump high ratings for his handling on the economy, but his handling of the pandemic has devastated him politically, especially with older voters.

Data points to this self-inflicted wound is getting much worse, as COVID-19 cases are still accelerating and are unlikely to peak by election day. Some would argue that Trump did his best in a situation like COVID-19 and that it should not be something that distracts from correctly assessing the full term of Trumps service to the US over the four-year presidency. Amongst all the fake news released it is becoming increasingly difficult for Americans and the rest of the world to accurately determine their own convictions based on factual truth. A frightening time we are entering into indeed.

Investment Outcome of the Election
The outcome, whichever way it goes will have a significant impact for investors, as each potential president has his own set of accompanying views and goals. This will ultimately create the investment backdrop for the next 4 years.
As it became clear earlier this year that Biden has a strong lead in the polls, the experts initially focused on how a Democratic Blue Wave will be bad for markets because of tax hikes and re-regulation under Biden’s instruction. As the election draws closer, the narrative seems to be shifting to the positive implications of a more normal US Presidency for Global Stability as well as the potential positive effects of his $2trillion climate plan. The point to stress is that the short-term impact of political outcomes is much less important than the longer-term business fundamentals when making investment decisions.

So, what does that mean for investors if this in fact is correct? What does a Biden-win mean for the US economy and the South African Economy?

The US Under a Biden victory
Biden would focus on the development and enhancement of the US working class. Biden’s policies are clear and it seeks to undo Trump’s economic policies in all major areas. The Biden plan is pro-wealth redistribution and could ultimately lead to inflation. Biden indicated that corporate tax rates will increase. It is likely to rise from 21% to 28%. He also mentioned the introduction of a minimum corporate tax of 15%. If this were to be implemented, it’ll have a negative impact for earnings, which is not ideal for equity investments. However, in our view there is likely to be some offsets, that could dampen the potential negative effect.

Under a Biden Presidency, the Democrats are looking at higher taxes for wealthy individuals and big corporations, a hike in the minimum wage and a huge spending spree on infrastructure and clean energy projects. Infrastructure and clean energy investment are a prominent feature in the Biden plan. A Biden administration would sharply increase investment in infrastructure like ports, lock and dam projects, and it would also launch a “clean energy revolution” through investment in clean energy, clean transportation, energy efficiency and advanced manufacturing, including installing half a million charging stations for EVs. Both programs will require $2 trillion in federal investment over the next four years, or about 2.5% of GDP per year at today’s GDP levels.

In our view, one of the biggest benefits to a Biden victory is an improved relationship with the countries main trading partners, mainly China. One thing that markets dislike is uncertainty and over the last couple of years, the trade wars between the US and many of their trade partners cast doubt in investor psyches globally. Although a Biden victory would mean higher taxes, a sense of calm in trade negotiations, along with a significant fiscal injection in the shape of a COVID-19 recovery package, bodes well for increased certainty, benefitting markets.

The election comes at a time when the global economy is starting to recover from the devastating effects of the pandemic. Notably infections rates are not under control, but it seems as if the fatality rate is dropping globally.
As the global economy improves post COVID-19, monetary policy remains extremely accommodative around the world, fiscal support has taken centre stage and activity started picking up which creates a favourable backdrop for growth assets to prosper.

As the global economy recovers, investor willingness and appetite to tolerate risk increases in their attempt to unlock greater returns. The US dollar, seen by many as a safe haven for times of uncertainty is also known as a countercyclical currency. This means that if the global economy picks up, money flows away from the dollar and toward higher potential returns, weakening the dollar in relative terms.

Not only is global growth is starting to move in the right direction, but interest rates in the U.S have fallen sharply. This decreases the differential benefits the dollar has had in the past for investors. It appears that a weakening dollar is on its way and this is said to have little to do with the election’s outcome. The reason is because U.S. policymakers have done little to object to or slow down the dollar’s decline. There is also a widening U.S. trade deficit, despite dramatic energy balance improvement and a heated tariff war with China.

A weaker dollar benefits commodity plays both directly and indirectly. Basic materials and mining stocks are excellent plays on the accelerating Chinese economy, but they also provide insulation from slowly-emerging long-term inflation risks.

South Africa and the US Under a Biden victory
Without any big surprises, this creates a platform for emerging market currencies to strengthen. South Africa being one of these that could benefit. Local South African bonds still offer some of the most attractive real yields across the landscape. The South African trade balance has been improving and one could argue that law-and-order is starting to take effect in South Africa. This could all lead to renewed interest from global investors and lead to a strengthening of the rand, while demand for our natural resources will be well supported by an improving economic backdrop.

However, as with any well diversified and balanced view, we need to be cognisant of the ever-present concerns as well. On the 26th of October, the US markets had their worst day since September. During a time where markets have been remarkably muted by all the stimulus, this type of sudden move creates a bit of added concern. In trying to understand why the sudden move happened to the extent it did, we cannot help but ask if the market has finally started to accept certain realities or accurately begin to access existing ones. Questions like; Will there not be a fiscal package prior to the election? What happens if the House is controlled by the Democrats (Blue), but the Senate is controlled by Republicans (Red), and would that hold up further stimulus packages even after the election? The move could also be evidence that investors are concerned about the rise of COVID-19 cases in the Northern Hemisphere as winter approaches. The US recorded its highest 7-day average for new cases in the last week of October.

It is for this reason that we believe a sound, well balanced portfolio is suitable for the current environment. A lot of bad news is already priced into many of the local South African companies, and provided the global backdrop continues to improve, it may lead to outperformance of some of the beaten down sectors in the SA economy. Structural reforms are needed if South Africa were to thrive in the coming years and decades, but the November US election could accelerate and inject a new found thirst for South African assets, which will no doubt benefit us during this time of crises.

–   Sybrand Englebrecht

Article Credits: Alpinemacro, Election outcome and the political aftermath; W-shape, Politics and Small Caps; Secular Changes; Bubble, or not? and BCA Research. The Chinese Tailwind Is Intact; No More Pre-Election Fiscal Deal

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