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Joe Biden victory: which consequences for the markets? | bestbrokers.co.uk

Joe Biden victory: which consequences for the markets?

The US elections are taking place in a couple of weeks and both candidates have polar opposite policies. Investors and traders are therefore wondering what the impact in the markets will be if one candidate or the other wins.


This is a companion discussion topic for the original entry at https://www.bestbrokers.co.uk/blog/2020/10/21/joe-biden-victory-which-consequences-for-the-markets/

Ignore what happens across the pond next month at your peril. This year the most important event for British stocks may not be a Brexit trade deal, or even a new wave of lockdown measures, but rather the American election next week.

What happens in Washington DC sends ripples across the Atlantic that can turn into tidal waves.

Recently I have undertaken a great deal of personal analysis from my records and from all other available financial data that I have been able to get my hands on to see how British stocks have performed during American election years past. From this I have found a distinct and, quite frankly, surprising pattern.

In 14 out of 17 elections years since 1948, excluding the 2016 election, the FTSE All Share has risen, “ with a rather extraordinary average annual return " of 32.7pc.

This data analysis finding is even more surprising when measured against the back drop of the average annual gain of British shares, which has been about 9pc in the past century according to financial records.

New American presidents tend to unleash more spending, as promised in their campaigns, which is good for American companies. A strong American economy supports British companies as it is our largest trading partner, accounting for about 15pc of exports.

Investor sentiment also plays an important role. If investors are confident about American shares then this can spread to British ones as well. If they are pessimistic then it increases the chances that they will sell British shares.

A research paper by the CFA Institute, an association of investment professionals, last year found that investor sentiment has the greatest effect on FTSE 100 companies as they are more international than smaller “mid-cap” FTSE 250 companies.

But what is clear is that in the 2020 election, individual policies could also affect British shares. Right now we have the front runner Joe Biden, heading up the Democratic Party candidature, who is outspoken against the oil industry and said he would kick start a transition to renewable energy and electric vehicles. Inevitably this has sparked significant kick back from the oil industry major players being reported in all the major US news outlets.

However the truth of the matter is that consumer demand is pivoting away from fossil fuels. Over the last 12 months in the USA there has been a notable rise in Green Energy investment with funds prioritising environmental, social and governance principles (ESG).

In a clear acknowledgement of this BP the British energy giant’s strategy calls for a 40% reduction in oil-and-gas production over the coming decade, greater investment in low-carbon energy and a ramp-up in wind and solar power. This is the biggest policy overhaul in the company’s 111 year history.

If Biden were to assume POTUS status on 3rd November, and were to bring his election manifest into effect then not long after we would expect to see a cut in demand for oil from America which would send prices lower and hurt British producers, like Shell and BP.

On the other hand if Trump were to be re-elected then he could have the opposite effect.

Right now the polls are showing Biden ahead by eight points - but a lot can happen in the next eight days!

According to the latest news reports the very polls that showed Trump ahead in the 2016 election run in are now showing Biden ahead.

With the coronavirus pandemic impacting on the voting methodology this time round, there has already been an early vote surge with well over 70 million Americans having cast their vote by post - which is more than half the total turnout of the 2016 ballot, so it looks like it could be a record-breaking ballot turnout.

It has also been recorded that the majority of these votes have been from Democratic supporters, wanting to get their say in safely, surely and early.

Meanwhile, on this side of the Atlantic, the FTSE 100 has fallen to its lowest level in six months as financial markets react to surging coronavirus infections across large parts of the world, and further across Europe the CAC and the DAX aren’t faring any better.

But the question was – ‘Joe Biden victory: which consequences for the markets?’

With the early turnout voters it seems that the USA has been gripped by a strong combination of pandemic panic simultaneously with election fever. This is not surprising in a country where the statistics for coronavirus deaths has topped 200,000; big question marks have been raised over the current administration’s handling of the pandemic.

The volatility of the markets, and the influence thereof by political events, was underlined on 2nd October when it was announced that the President and the First Lady had both tested positive for Covid-19. Inevitably this caused great concern for investors and there was an immediate dip in the markets, which later slowly rallied. So inevitably the volatility will continue through this election period until a firm steer is indicated as to where America is headed and under which political persuasion.

So right now you need to be aware of the best way to mitigate your risks even on this side of the ocean. British investors in the international markets with any foreign holdings focussed in the USA should consider themselves exposed and prone to loss.

It’s not just a simplistic case of which candidate or which party wins – of equal concern and effect on subsequent markets is the degree of the victory and who will hold the future ground in the Senate ( currently controlled by a Republican majority ) and Congress (currently dominated by the Democrats) . Believe it or not if the control is spread evenly between the parties that can spell bad news for investors as then there is no certainty over the approval of any future stimulus packages.

After the 2016 election we witnessed a rise in US equities as a result of Trump’s early tax cuts –similarly if we see a double house majority, in both the Senate and Congress, with a win for Biden then we could see the opposite effect of increased regulation on business and higher taxes which could be a bad omen for shares.

So maybe now would be a good time for you to check out your US exposure margins!

One of the key considerations for foreign investors has to be currency exchange rates. Throughout the current incumbent’s presidency the US dollar has remain in the main in a strong position. But what will happen come election result time, especially if it were to be contested? With the current volatility being seen in the UK and EU currencies any European investor is going to have move wisely and smartly to ensure any gains in any foreign exchange-linked bets.

The increasing recent tensions and well-publicised animosity between the Democrats and President Trump over a new fiscal stimulus package, as we draw nearer to Election Day, has caused concern for investors here at home and in the USA.

But on the day it all comes down to Biden vs Trump - so where are we with that? The latest poll showings from the New York Times, the paper presents a regularly updated compendium table of the most ‘popular’ presidential polls, continues to show Biden slightly ahead of Trump across most of the States.

The recent fall in the US stock market seems to underline this sentiment as investors take heed of Biden’s intention to raise taxes should he get into office.

If there were to be a Trump victory, against the current poll trend - something not altogether unheard of in recent times, as you will remember that all the polls were wide of the mark in their predicting a 2016 Clinton landslide of between 70% and 90% - there would probably be very little change in the markets as having cut corporate taxes from 35% down to 21% he’s obviously considered as being a very much a pro-business president. Such a result would also, almost inevitably, mean further conflict with China at least in the commercial arena.

So what for UK investors? Well according to the Financial Times “ sterling provides them with a natural hedge. In times of financial stress — such as a possible future dollar shock — the pound tends to soften because of UK markets’ dependence on inflows of foreign capital. So the sterling value of US shares would not be hit as hard by a dollar sell-off as their value in a harder currency .”

So that leaves investors in the UK with little else to concern themselves with in the coming months - well, apart from Brexit and the government’s continuing reliance on Scientific Advisory Group for Emergencies (Sage) advice.

Meanwhile, if you are in need of an interesting and highly topical read you could do worse than check up on the detail in Yale Hirsch’s “The Presidential Election Cycle Theory”.

It seems as though it could all turn on a coin toss at the moment. Not more than a week ago much (most?) of the media were producing headlines that could be forgiven for knowing the US presidential election results already as they were predicting a resounding victory for Biden and the Democratic party. Much of these headlines written ‘on the back’ of numerous US poll results at the time that were indicating a change of the man in charge.

I’m not a fan of polls, and the result of the last election against what the polls were telling us beforehand explains why - they all got it horribly wrong. Investors on both sides of the Atlantic are all too aware they not only the polls but they also failed to predict the shock victory of Donald Trump in 2016. Right now the latest indicators are that Trump is closing the gap on Biden in many States - but will it be enough to keep him his seat?

The thing with polls is, in my opinion that many people give the answer that they believe is being looked for no matter how clever the pollsters might think they are being. Worse than that, particularly in a presidential race such as this one, if you’ve ever lived in the USA you’ll know just how inflammatory politics can be - so would the ‘quieter’ (there are some!) Republican supporters necessarily are keen to openly acknowledge their intentions? Many voters, of both persuasions, still see this as a choice between the devil and the deep blue sea.

So will the election result affect us in the UK, to which the answer is most certainly and on several fronts.

First and foremost trade sits at the top of the list. We are currently obliged to adhere to EU negotiated trade terms until 1st January 2021 after which we can establish our own US/UK trade terms which, hopefully, will be less complicated - with the intention of making it more straightforward and more economical to buy and sell goods to each other - than the current arrangement.

This is no small consideration as the US is the UK’s second biggest export market after the EU but when any deal is finalised will depend very much on which president is in the driving seat.

We know that Trump has already firmly nailed his intentions to the mast on this by clearly stating that he wants a speedy trade deal and with lower tariffs.

However, with Biden at the wheel a speedy resolution to any new agreement could be a long time in the making as you might recall that prior to the EU referendum in 2016 Obama that if the UK voted to leave it would be at the “back of the queue” in any trade deal with the US, and Biden was his vice president then.

On top of this consideration, regardless who is president in 2021, the US congress has still got to approve the trade agreement detail - so they have the opportunity to speed up or slow down the process depending on the majority inclinations there.

So what else is on the list? Again, once out of the EU, we will need to establish the ground rules in all areas including these key points:

  • food standards,

  • medicine prices (a Trump priority, with the US ‘Big Pharma’ trying to influence matters) related to which we had the UK negotiators clearly stating back in March 2020 that in any US trade talks : "The NHS will not be on the table. The price the NHS pays for drugs will not be on the table."

  • and the Irish border as both Biden (with his Irish roots) and Trump have said must play an integral political part to any agreement, with no hard-border’ - yet the UK’s Brexit withdrawal agreement still remains the subject of ‘restructuring’.

But to name a just a few - there are other issues such as digital services taxation, financial services, motor vehicles, agriculture exports.

Then we have the exchange rates to take into consideration; the relative strength of the pound and dollar has a significant impact on your eventual returns.

All of these factors impinge on the markets and you can be sure that with these the initial fallout is going to be the one thing investors and the markets don’t like, and that’s volatility. So the key is, regardless of which runner your insight leads you to believe, Biden or Trump will be setting up camp in the Oval Office in 2021, you need to focus on a strong diversified portfolio of quality and durable stocks to ride out the next few months.

Asked if Mr Biden would prioritise trade talks with Britain, a figure advising the Biden campaign on foreign policy told The Telegraph : “No, definitely not in the first 100 days.”