My Financial Advantage – Article Introduction

With the US election now over and the outcome decidedly favouring Joe Biden (despite threats of litigation which may or may not eventuate from the Trump campaign), the focus now turns to what a Biden Presidency may mean for markets and investors.

I hope you find the article informative.

Regards

Nicholle Shepherd – Principal Advisor

A Joe Biden Presidency: Implications for Investors and Australia

Biden’s key policies

Taxation: Biden plans to raise the corporate tax rate to 28% (reversing half of Trump’s cut to 21%), return the top marginal tax rate to 39.6% (from 37%) and tax capital gains and dividends as ordinary income.

Infrastructure: Biden plans to spend $1.3trn over 10 years.

Climate policy: Biden aims for the US to reach net zero emissions by 2050 by raising the cost of fossil fuels and boosting the development of alternatives (possibly with a carbon tax). He would take the US back into the Paris Climate Agreement.

Regulation: Biden is likely to end the era of deregulation.

Healthcare: Biden wants to strengthen Obamacare and limit drug prices.

Trade and foreign policy: Biden would likely de-escalate tensions with Europe and strengthen the alliance, work with international organisations like the World Trade Organisation, work to re-establish the nuclear deal with Iran and adopt a more diplomatic approach to dealing with trade and other issues with China (working with Europe and Asian allies in the process).

Fiscal stimulus: Biden would support another round of fiscal stimulus of around $US3 trillion or so.

Key risks under a Biden presidency

    • Expect more episodes of budget gridlock including over the debt ceiling that needs to be increased by July next year.
    • While the Republican Senate will serve to head off left ward drift under a Biden presidency – by limiting what he can do in areas like tax, climate policies etc – this may alienate many of Biden’s more left-wing supporters reinforcing cynicism. Then again, staying in the political middle is probably the best way to see a Democrat re-elected in 2024.
    • The contentious nature of the election fuelled in large part by Trump’s claims of voter fraud may see divisions remain intense in the US, particularly with Trump sniping on the sidelines. This could lead to unrest in the short term.
    • President Trump could also throw curve balls between now and inauguration day on 20th January, possibly in terms of refusing to leave office (although we suspect key Republicans will progressively desert him) and also potentially in terms of tensions with China, Iran and North Korea.

Economic impact of a Biden presidency

Our base case remains that while it will be bumpy and uneven, the US economy will continue to recover from the coronavirus hit, helped along by more fiscal stimulus and ultra-easy monetary policy. This will be accelerated if highly effective vaccines are deployed to a wide proportion of the population through next year.

The negatives from the tax hikes are likely gone due to the Senate and the impact of more regulation under a Biden presidency should be offset by a ramping down of the trade war compared to what would have happened under Trump.

The main near-term risk is that Biden announces another lockdown to slow coronavirus resulting in another hit to growth. But while this is a short term negative it should ultimately result in a more confident reopening like we are seeing in Australia.

Market implications for a Biden presidency

Share markets have so far responded favourably to news of Biden being ahead in presidential election counting. However, with Republicans likely retaining control of the Senate this is on the grounds that Biden’s promised tax hikes likely won’t happen, but with some sort of fiscal stimulus still likely.

Beyond election challenges we are now into a period of the year where shares normally perform well seasonally, and US shares have typically gone up initially in the aftermath of close elections.

Ultimately, looking beyond the initial knee jerk reaction, the combination of averted tax hikes but some more US stimulus and a toning down of the trade war may be slightly more positive for non-US shares and Australian shares relative to US shares and slightly negative for the US dollar including against the Chinese Renminbi and Australian dollar.

The move towards a more diplomatic approach to resolving issues with China could be particularly positive for Australia to the extent that it would also help encourage Australia and China to resolve tensions that have been ramping up recently. This in turn would help avert a further threat to our exports to China and support Australian exporters and the Australian dollar.

Trump’s “Phase One” trade deal with China may also have been working against Australia to the extent that reported Chinese restrictions on imports from Australia may have been partly motivated to free up scope for China to import more from the US to meet the terms of its deal with Trump.

For those worried about “left wing” Democrats, it’s worth noting that US shares have done best under Democrat presidents with an average return of 14.6% pa since 1927 compared to an average return under Republican presidents of 9.8% pa.

However, the best average result has actually occurred when there has been a Democrat president and Republican control of the House, the Senate or both. This has seen an average return of 16.4% pa. By contrast the return has only averaged 8.9% pa when the Republicans controlled the presidency and Congress.

Implications for Australia

The main positive implications from a Biden Presidency for Australia are likely to be:

    • Ultimately a stronger US economy which will benefit the Australian economy;
    • A stronger more consistent relationship with the US;
    • A toning down of the trade war with China in favour of a more diplomatic and engaged approach to resolving trade issues which will be less negative for Australia, and;
    • US re-entry into the Trans-Pacific Partnership.

More aggressive action on climate change in the US may also force Australia and Australian companies (that engage with the US) down a more aggressive response to climate change too.

Beyond short term uncertainties around US civil tensions in the aftermath of the election and when US fiscal stimulus will come, overall, we see it as benefitting Australian shares and the Australian dollar.

Source: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital.