2020 US Presidential Election: Market Commentary

Overview:

The 2020 US Presidential election was the most divisive in living memory, with added anxiety spurred on by the ongoing pandemic battle. The US economy seems well enough in the circumstances but the pandemic and its poor management is a lingering problem. What does this mean for Australia and investors?

Analysts usually consider a Republican President good for markets as they tend to reduce taxes. Democratic Presidents are often less popular with investors, as they tend to raise taxes and spend too much. Joe Biden proposed higher taxes, more regulation and economic stimulus, aiming to largely unwind Trump’s tax cuts and the deregulation he arranged.

However, the US economy now needs Government to spend freely and stimulate activity. Trump might have kept taxes lower but Biden is keen on more stimulus spending, which the market now views as neutral or positive.

Unfortunately, it’s never that simple.

An environment of political and economic uncertainty

The election wasn’t the Democratic ‘blue wave’ sweep polls predicted and now the final US senate result awaits a January run-off vote for two Georgia senator spots as either side lacks a clear 50% majority. The tight election may very well still result in a Republican Senate that looks to constrain preferred Democrat policies. While for now, the market seems happy that such an outcome may limit tax rises, this could also mean that the desired Democrat stimulus may also be modified. Meanwhile, Trump’s childish desperation to hold power and resist its peaceful transfer adds some further uncertainty.

If there’s one thing markets like least, it’s uncertainty and there’s still plenty of that.

The market isn’t pricing with the anticipation of large tax increases under Biden, but the Senate result may sway this thinking. The market seems to be assuming stimulus policies may pass quickly, although it’s not yet bankable.

Beyond the election, markets seem unconcerned about the pandemic worsening in the US nor the rest of the world at large. Instead, investment markets seem to be holding out for an imminent vaccine that can be rolled out quickly. If this expectation does not eventuate, you can most certainly expect more market volatility in the months ahead.

Resisting the short-term nature of post-election investment markets

Biden’s win may limit market volatility if economic stimulus is passed, strengthening the US economy. The market will also welcome Biden trade and foreign policies if they are successful in rebuilding ties with trade partners and dampen current conflict with China.

What does this mean for Australia? The positives from a Biden Presidency for Australia will see the Australian economy benefit from a stronger US economy; a stronger Australia/ US relationship; a more diplomatic approach with China in resolving trade issues which should improve Australia’s current issues with China; and the US repairing relations with global partners to help global trade in general. Along with increased US stimulus, we see all of the above benefitting Australian shares and the Australian dollar.

It is important to note, however, that these are all short-term themes.

While 2020 is arguably the most important US Presidential race for voters in a generation, the outcome may be less important for investors that take a long-term perspective. Those who look through the politically charged volatility of the current election cycle may be richly rewarded.

Despite short-term political spectacles, the world faces some undeniable economic challenges. These challenges are the overarching forces that are much more likely to drive the fortunes of markets and companies. These challenges also present some new and modern business opportunities.

Key Economic Challenges

High Debt & Low-Growth/ Inflation & Interest Rate World

With monetary and Fiscal policy close to exhaustion, when the dust settles on these high-profile events, we expect a Japan-style low growth/ low inflation environment to prevail. This is because high debt loads will limit future spending and hence aggregate demand will fall over time, leaving to excess supply. As a result, a growth style of investing is predicted, supporting the need for active investment management.

Technology innovation is deflationary and disruptive

Technology has moved from the edges of our lives to the core of society and business. While helping to improve our lives, make us more efficient, and arguably more connected, new technology-centric businesses will continue to drive prices down and act as a deflationary and disruptive force. As investors we must be focused on the long-term sustainability of the industries in which we invest, with an eye to investing in the disrupters themselves.

The internet continues to globalize the world and move power away from regions

A shift from cash to electronic payments, from traditional media to online media and from traditional retail to e-commerce.

Aging Population and Declining Population Growth

A need for affordable healthcare with government incentives for R&D in healthcare to produce innovation. Examples of this are CSL and ResMed.

Natural Resource constraints & disruption, including climate change

The transition to sustainable energy and transport.

Changing of the guard of World Powers

While Biden may work to improve ties with US trade partners and reduce the current conflict with China, the changing of the guard is a seemingly undeniable and likely to cause bouts of volatility over time.

When your time horizon is in months, all you can focus on is what’s happening in the near future – trying to second guess the impact of quarterly earnings announcements or high-profile events, like elections. For example, if you backed a Trump win, you might have taken a bet on a short-term return from fossil fuel stocks, but looking beyond the short-term, you might take a different tack. With a long-term perspective, predicting short-term sentiment becomes less valuable than being able to gauge the long-term sustainable earning power of a business, which in turn, is driven by a range of factors, such as:

• Strong management teams with a long-term focus
• Sustainable competitive advantages that offer customer value
• Large addressable markets with growth potential
• Pricing power with ability grow market share and margins
• Strong balance sheet & ability to generate high return on capital

Perspective matters when investing. In a low growth world, such business fundamentals and overall economic themes become critical. At Perks, we focus on investing in quality companies with sustainable earnings and low gearing that can prosper in this increasingly disrupted world. A long-term view encourages us to think like business owners rather than short-term speculators.