When America picks a new president next week, it’s more than likely to have an impact on your investment portfolio whatever the outcome.

US voters go to the polls on 3 November to decide whether Republican candidate Donald Trump deserves another four years in office, or whether the Democrat’s Joe Biden should be elected the next US president.

The general consensus seems to point to three likely outcomes. Firstly, a Biden landslide where the Democrats keep the House of Representatives and take the Senate, which would allow Biden to push his agenda through Congress a lot more seamlessly.

Nate Silver, the American statistician who’s made his name forecasting US elections, gives Biden a 10% lead in the national polls and an 84% chance of winning the electoral college, the system which helped Trump win the last election despite losing the popular vote to Hilary Clinton by 2.87 million votes.

A second plausible scenario is a Trump win, though barely anyone thinks it would be a landslide so the Republicans in this case would likely hold the Senate while the Democrats would keep control of the House of Representatives, in which case it would be almost ‘as you were’.

The last outcome, which investors fear the most, is a contested election where it’s a close call and either side disputes the result.

WHAT EACH SCENARIO MEANS FOR THE STOCK MARKET

Three scenarios and what they mean.

1. BIDEN WINS

• Sell off in some stocks, particularly tech.

• Rally in green/clean energy stocks.

• Higher interest rates.

2. TRUMP WINS

• Stock market volatility increases, mostly due to another four years of disruption to global order.

• But not before a relief rally in markets.

• Increased US-China tensions.

• Two houses of Congress split (Republicans control the Senate, Democrats the House of Representatives), meaning little fiscal stimulus ability.

3. CONTESTED OUTCOME

• Stock market sell off due to uncertainty.

• Spike in volatility.

• Weaker US dollar.

• Higher gold prices.

As for what’s likely to happen on the stock market, in summary, if Biden wins, given his policy announcements, it’s likely that green energy stocks could rally, oil and gas stocks will take a hit, big tech could suffer, financials are likely to fall and marijuana stocks could go higher.

If Trump wins, expect a relief rally from the Nasdaq and S&P 500, while the oil and gas sector will jump and US small-caps could also bounce, but there’s likely to be a selloff in healthcare and Chinese tech stocks.

If the result is contested, most likely there’ll be a widespread market selloff, higher volatility, lower earnings multiples for the majority of stocks and a rally in the gold price.

A precedent for this comes from the 2000 election, which was unresolved until early December when the Supreme Court ordered a stop to the Florida recount following a month long legal dispute. The S&P 500 dropped 9% before George W Bush was declared victor in early December.

However, arguably the more divisive nature of politics two decades on means a contested result could have more far-reaching consequences. To date Trump is yet to commit to the peaceful transfer of power which has been a bedrock of US democracy since its inception.

Under both candidates, stocks exposed to infrastructure are expected to do well as Trump and Biden have each committed to a big infrastructure spending plan to spur an economic recovery after the coronavirus pandemic.

INFRASTRUCTURE SPEND LOOKS LIKELY REGARDLESS

Canaccord Genuity’s chief market strategist Tony Dwyer says that despite the vast differences between the candidates driving an unpredictable outcome, there is one certainty.

‘No matter who wins, there’s going to be a stimulus package that’s going to have a focus on infrastructure. Both sides agree that this will ultimately help industrials, materials and the more cyclical market sectors,’ he says.

It’s likely this would be a boon for equipment rental firm Ashtead (AHT), as well as building materials supplier CRH and plumbing and heating product provider Ferguson (FERG).

This was visible for example on 16 June when the share prices of all three increased between 5-8% after reports emerged the Trump administration was preparing a near $1 trillion infrastructure proposal, reserving most of the money for traditional infrastructure work, such as roads and bridges, but also setting aside funds for things like 5G wireless infrastructure and rural broadband.

It could also help construction company Balfour Beatty (BBY), which has a big division in the US and has made its name as a specialist in the traditional hard infrastructure projects that will still be key post-election to spur America’s economic growth.

WHAT ARE THE POLLS SUGGESTING

At the moment a Biden ‘clean sweep’ seems generally to be considered the most likely outcome, but remember the opinion polls called the US election wrong in 2016, with Clinton leading in almost all pre-election nationwide polls at the time.

Eleanor Creagh, a market strategist at Saxo Bank, points out the real-world margin of error has been close to 6% for some state polls and thinks the probability of a contested outcome ‘remains high’.

She says many market participants are in ‘wait and see mode…. conviction is low and investors/traders are treading water ahead of the election. The race could be far tighter than the polls are indicating’.

If he does win, Biden’s main economic policies are to raise the minimum wage and invest in green energy, things which are likely to go down well with two types of traditional Democrat voters – young people and blue collar workers.

As part of his ‘Build Back Better’ plan, Biden plans to raise the minimum wage in the US to $15 an hour, something most likely to benefit young people working in the retail and hospitality sectors that would be affected the most by this.

GREEN NEW DEAL

But the most eye-catching part of that plan is to spend $2 trillion on infrastructure and clean energy, in a so-called ‘Green New Deal’ – an echo of the policies introduced by president Franklin Roosevelt in the wake of the Great Depression nearly a century ago.

The aim would be to deploy all the cash within the next four years. This is designed to appeal to working class union workers, who perform most of those jobs in green manufacturing and building infrastructure.

The money would go on traditional infrastructure projects like rail, roads and bridges, as well as projects for ‘clean, American-made electricity’ and the construction of around 1.5 million new ‘sustainable’ homes and housing units, as well as the retrofitting of four million buildings to modern sustainability standards.

Jefferies analyst Chris LaFemina says that if renewable energy and things like electric vehicle charging points turn out to be a key part of the plan, demand for metals in the US would ‘materially increase’.

LaFemina says this scenario would likely lead to higher prices for copper, nickel and aluminium as supply constraints – especially in copper and nickel – will limit the mining industry’s ability to bring online capacity in response to stronger demand.

He adds the market discounts commodity prices at or below current spot levels, so this scenario is largely not taken into account in mining shares today.

In addition, part of the cash would be spent on innovation to drive big cost reductions in clean energy technologies, including battery storage, negative emissions technologies, the next generation of building materials, renewable hydrogen, and advanced nuclear, with a plan to ‘rapidly commercialise them’.

Hydrogen stocks have risen markedly after policy and funding announcements from governments, and any commitment from Biden towards the sector should be become president (particularly if the Democrats take both Houses of Congress) would likely be a catalyst for further share price growth.

On the London market, the stocks in the sector are AFC Energy (AFC:AIM), Ceres Power (CWR:AIM) and ITM Power (ITM:AIM), though AFC and ITM are still pre-revenue and none have ever turned a profit. A safer way to potentially play this sector would be through FTSE 100 chemicals group Johnson Matthey (JMAT), which is exploring the development of hydrogen fuel cells.

THREAT TO BIG TECH

Big tech would probably take a hit under Biden though. The veteran Democrat has pledged to roll back on Trump’s tax cuts and says he’ll increase corporate income tax from 21% to 28%.

A part of this also involves what some have called the ‘Amazon tax’, a minimum 15% tax for all companies with revenue of over $100 million – a clear indication of who that could affect.

In addition an antitrust subcommittee of the Democrat-controlled House Judiciary Committee released a 449-page report excoriating Amazon, Facebook, Apple and Google owner Alphabet for what it calls systematic and continuing abuses of their monopoly power. Recommendations from the report include ways to limit their power, force them out of certain areas of business and even a break-up of some of them.

Analysts at RBC say the tax changes alone would negatively affect the US tech sector, while analysts at Jefferies point out the banking sector would also be hit.

As well as those who hold the big tech names, those who hold an S&P 500 exchange-traded fund (ETF) beware, as RBC forecasts that Biden’s tax plans would bring down the S&P’s earnings per share (EPS) by around 9%. While Jefferies estimates that for some companies, every 1% rise in corporate tax can impact EPS by 1.5%.

If Trump gets re-elected, it’s expected the US will continue along the path of deregulation and lower taxes for corporates and high-income households, which would no doubt be welcomed by the market. 

TRUMP WIN TO BOOST OIL & GAS INDUSTRY

The Republican would also be a boon for oil and gas stocks, which rallied earlier this month after he recovered from coronavirus, given the US’ withdrawal from the Paris climate agreement, something which will only be rubber stamped if Trump wins next month.

Most of Trump’s economic policies are similar to his four years in office up to this point. Unlike Biden, he plans to continue taking a hard-line stance on China and ‘end reliance’ on the country for manufacturing, offering tax credits to entice American firms to move factories back home and out of China.

It’s worth noting that various presidents, particularly Trump, have liked to talk about how much the stock market has gone up on their watch and often use that in their re-election campaigns in a bid to sway voters.

USING THE MARKET TO PREDICT THE OUTCOME

But research from the Socionomics Institute in the US found no historical difference in stock market performance between Democrat and Republican presidents, and interestingly, the researchers found that while you can’t use the person who gets elected to predict the stock market, you can use the stock market to predict who gets elected.

In a paper from 2012, researchers from the institute found that the three-year net change in the stock market is a better presidential re-election indicator that GDP, inflation and unemployment combined. They say that’s likely because the market better reflects social mood.

Either way it’s likely that shares – in London, across the pond and globally given America’s influence – will rally after the election, regardless of who wins, as long as the outcome is not contested, with the unwinding of hedges made by investors and the reduction in uncertainty alone seeing markets trade higher in the event of a clean outcome.

But given uncertainty is the one thing investors absolutely hate, you can bet your bottom dollar that stock markets will plunge if the outcome is in doubt for a prolonged period.

---

WHAT TO BUY…

IF TRUMP OR BIDEN WIN

Ashtead (AHT) £29.49

Equipment hire firm Ashtead (AHT) has long been considered one of the top UK quality stocks, and has a stellar track record of growth having generated a 3,120% total return over the past 10 years.

Understandably there are questions as to whether it can keep up its incredible growth. But with both candidates in the US election committed to spending big on infrastructure, and Ashtead making the big bulk of its earnings in the US through its Sunbelt business (a specialist in infrastructure), it’s arguably one of the best placed stocks on the London market whatever the outcome.

Some analysts caution the company is overvalued relative to its prospects for growth and return on capital employed, but others think the price is still good value given the firm dominates its markets and is expected to continue gaining market share, something which would put it in a great position for an infrastructure boom.

---

IF BIDEN WINS

NextEra Energy (NYSE:NEE) $302.67

American utility giant NextEra Energy (NYSE:NEE) would be a clear beneficiary from a Biden victory, particularly if the Democrats take both houses of Congress and Biden can push through his green infrastructure spending plans.

No power company in the US generates more from wind and solar than NextEra and its NextEra Energy Resources division, which builds solar and wind farms and sells the power to others, is one of the biggest renewables companies in the world.

For 2021, NextEra Energy is increasing its financial expectations ranges by $0.20 and now expects adjusted earnings per share to be in a range of $9.60 to $10.15, while for 2022 and 2023 it expects to grow 6% to 8% from the expected increased 2021 adjusted earnings per share. A Biden victory and renewable energy spending plan would most likely only see this increase further.

ISHARES GLOBAL CLEAN ENERGY (INRG)

Clean energy is set to be one of the main beneficiaries under a Biden presidency, and one exchange-traded fund (ETF) which could capture a lot of that upside is iShares Global Clean Energy (INRG).

The ETF has already had a great year, rising 85% year-to-date as investors bet on Biden winning, a clear indication of investor sentiment towards the sector should the Democrat actually win.

But its constituents, the 30 large caps which make up the S&P Global Clean Energy index, are also exposed to the structural growth story of renewable energy globally.

Solar and wind farms across the world are now becoming economically viable without government subsidies, a big tailwind for demand for solar panels and wind turbines as the world transitions to renewable energy.

This ETF does have a high total expense ratio of 0.65% year, but this is still less than a lot of active funds that haven’t performed anywhere near as well.

---

IF TRUMP WINS

ISHARES CORE S&P 500 UCITS ETF (CSP1)

The S&P 500 has hit a record high under Trump’s presidency and the big tech names which have the index’s gains have benefited from his policies.

If Trump gets re-elected, there’s likely to be a relief rally in markets and notwithstanding the possible impact of potentially deteriorating economic fundamentals on the stock market, there’s a reasonable chance the S&P 500 could continue its upward rise under Trump’s watch.

US stock markets are also notoriously efficient so the ability for an active fund manager to add value is limited. A better option for investors in the large-cap US space is to go down the passive route.

iShares Core S&P 500 (CSP1) could be the best option here, given its very low total expense ratio of 0.07% a year and the fact it holds almost $40 billion of investors’ money, meaning the bid-ask spread when looking to buy or sell the ETF would be very tight.

ARTEMIS US SMALLER COMPANIES (BMMV576)

US small caps are expected to get a lift under another four years of a Trump presidency, with his inward-facing agenda, renewed tensions with China and promise to boost domestic manufacturing all likely to benefit smaller companies at the expense of large-caps.

A stronger US dollar, which could be a corollary of a Trump win, would also make large-cap exporters less appealing to big investors and tilt them towards the smaller domestic-facing stocks who aren’t as affected by the greenback’s fluctuations.

Artermis US Smaller Companies (BMMV576) is the stand out pick here for investors looking to get exposure to this space.

The fund has a strong performance record and has delivered an annualised return of 14.7% over the past three years compared to just 3% for its Russell 2000 benchmark index. It has also weathered the coronavirus crisis and is currently up 12.7% year-to-date, compared to a 2.2% decline from its benchmark.

It has a reasonable ongoing charge of 0.87% a year, and has a highly experienced manager in Cormac Weldon who has over two decades experience of investing in US stocks.

‹ Previous2020-10-29Next ›