A Biden victory and split Congress may be welcomed by markets
With President-elect Joe Biden facing a split Congress, investors could welcome the resulting “Biden-lite” agenda, which may include portions of his spending plans – such as fiscal stimulus and infrastructure investment – but little in the way of tax increases.
Markets staged an impressive relief rally during the week of the US presidential election; while the market narrative shifted from a Democratic “blue wave” to a narrower margin of victory for Joe Biden, the overall tone seemed to be risk-on in financial markets
Key priorities for the Biden administration will likely include building a new pandemic taskforce, passing fiscal stimulus, funding infrastructure, and enacting climate policy via executive order
The Biden administration’s renewed focus on infrastructure spending and initiatives related to climate change and clean energy could create new opportunities for investors, including in the private markets space
With a potential “Biden-lite” policy agenda, markets will likely shift their focus to economic fundamentals, particularly around the prospect of an effective vaccine to counter Covid-19
Stronger potential US economic growth, alongside low interest rates and further stimulus, may provide a favourable backdrop for risk markets globally in 2021
Joe Biden’s apparent victory in the US presidential election marks an end to months of political uncertainty and turmoil. While both Mr Biden’s victory and the outcome of the Senate races have yet to legally finalised – with two Senate races in Georgia set to be determined in January 2021 – the base case in markets seems to be a Biden presidency and split Congress. This outcome may usher in a more diluted Biden policy agenda.
Indeed, the market narrative seemed to shift in the final days before the election: hopes of a Democratic “blue wave” turned into cheer around “Biden lite”, as Treasury yields declined and equity investors rotated from cyclical value stocks towards opportunities in growth and technology.
More broadly, the financial markets seemed relieved that this major political event was concluding, leading to a wave of risk-on sentiment in the US and globally. With a more incremental approach to policy changes under a Biden administration, we could see markets perform favourably, as both the US and non-US markets potentially benefit from more stable trade relations and better growth prospects heading into 2021. Markets may be buoyed by a return to a more multilateral approach to foreign policy, and the reduced uncertainty that may result.
Perhaps the key concern for markets under a Biden presidency was his proposed USD 4 trillion in tax hikes, including increasing corporate tax rates, capital gains taxes, and personal taxes on wealthy individuals. However, if Congress is divided, most – if not all – of these tax policies will be difficult to enact. And importantly, the Biden team may not view these as a year-one priority, as the pandemic and economic relief take centre stage again.
Top priorities of a Biden-Harris administration
As President-elect Biden and Vice-President-elect Kamala Harris consider their key priorities in the weeks ahead – potentially in the absence of a traditional concession from the sitting president – these focus areas could include:
Creation of a new pandemic taskforce
As the coronavirus pandemic remains rampant in the US and globally, one of the Biden team’s first priorities will be to address the virus head-on, with support from a new pandemic taskforce of scientists and medical officials. This will set guidelines to stop outbreaks, double down on testing and contact tracing, and invest heavily in vaccine distribution. This will mark a return to “relying on the science” as a fundamental pillar in managing the pandemic.
One area of agreement for both Democrats and Republicans is the need for an additional fiscal stimulus to provide pandemic relief – albeit in varying amounts. Thus far, Congress has issued nearly USD 3 trillion in stimulus, and Democrats and Republicans have proposed competing packages for a next round of stimulus of USD 2.2 trillion and USD 500 billion respectively. Both packages cover unemployment benefits, small business relief, and another round of stimulus cheques to households. Notably, Senate majority leader Mitch McConnell has indicated he would like to see a deal done, perhaps even in the lame-duck period before inauguration day. We could certainly see stimulus passed early in the next presidential term, which is likely positive for risk assets.
More executive orders on climate and clean energy
Mr Biden’s plan includes a USD 2 trillion investment in areas of clean energy, including wind, solar and renewable energy. While this policy would likely face opposition in a split Congress, we may still see a Biden presidency seek to push forward his climate and sustainability agenda via executive order, and he may appoint more “environmentally friendly” leaders to his cabinet. Overall, we could see new opportunities for sustainable investing under an administration that is pledged to take climate change seriously. Some actions that the new president could take without the support of Congress may include:
Rejoining the global Paris climate accord, which aims to keep the global temperature rise this century to under 2 degrees Celsius above pre-industrial levels
Reversing some of President Trump’s executive orders on energy, including a March 2017 order for federal agencies to dismantle their climate policies
Signing executive orders to cut emissions, including instructing agencies to develop methane limits and tightening efficiency standards for buildings and appliances.
Another area where both Democrats and Republicans may ultimately agree is infrastructure investment. Both Mr Biden and Mr Trump have talked about investing in traditional infrastructure – such as the rebuilding of roads, bridges and airports – as well as technology infrastructure like 5G and artificial intelligence. While the Biden team proposed a USD 1.3 trillion infrastructure package, we may ultimately see a smaller package approved by both sides, perhaps in the USD 750 billion range. This would nonetheless represent an important investment in US economic growth and potential jobs. It could also stimulate opportunities in the private markets space to help finance these critical projects.
Returning the US to the world stage
In addition to rejoining the Paris climate accord, Mr Biden has also talked about restoring US membership in the World Health Organization (WHO), as well as repealing via executive order the travel ban on majority Muslim countries. Overall, a Biden administration would favour the US returning to the world stage as an ally and leader, aligning itself once again with its historical allies and perhaps coordinating globally on climate solutions.
In terms of US-China relations, while Mr Biden has pledged to be “tough on China”, he has indicated he prefers a less unilateral approach than his predecessor and plans to bring US allies, labour groups and environmental organisations to the negotiating table. Mr Biden could repeal some tariffs via executive order but may also use these for negotiating leverage.
Reaching across the aisle
With a focus on reconciliation, a Biden administration may “reach across the aisle” for Cabinet and key position appointments. Indeed, there has been speculation that Mr Biden may maintain Mr Trump appointee Jerome Powell as chairman of the Federal Reserve and consider Republican senator Mitt Romney for the position of US Treasury secretary. Markets may welcome this balanced approach to governing, particularly in key roles impacting financial policy.
Markets like evolution, not revolution
Overall, the theme of a Biden victory and split Congress seems to be evolution rather than revolution – perhaps what voters and investors welcome most when it comes to government policy. This outcome also perhaps lessens the probability of unintended consequences that we may have seen from a “blue wave” – such as rapidly rising interest rates which could be disruptive to markets. Also note that, historically, investors have seen seasonally stronger market returns from election day through year-end.
Implications for investors
Against this backdrop, we could see a broadening of participation across asset classes, with cyclical parts of the market performing alongside growth technology, and non-US markets playing catch-up, especially given more congenial global relationships and perhaps an ongoing softer US dollar. Notably, China and north Asia could benefit most from a thawing of tension, alongside better virus outcomes in that region overall.
In credit markets, with yields expected to remain stable and low, we would continue to see investors “hunt for income”. Our preferred credit risk includes parts of select high-yield assets (including “fallen angel” strategies), convertible bonds (which can participate in equity upside as well) and curve- steepener strategies that benefit from better growth and inflation potential.
Finally, we see potential areas of opportunity outside of traditional value/growth strategies, including infrastructure, clean energy, US housing, and technology infrastructure like 5G – all of which could thrive in a post-election environment.
With the presidential race seemingly decided, there are several reasons to be optimistic about the broader economic environment as we head into 2021, particularly if we see one or more Covid-19 vaccines approved – see our earlier piece for full analysis.
How a new trading bloc signals a gravitational shift eastward
The recently announced Regional Comprehensive Economic Partnership will likely enhance China’s continued growth story – and will help boost global GDP.
The new Regional Comprehensive Economic Partnership (RCEP) creates an economic bloc of Asia-Pacific nations, covering a third of the world’s population
The deal will apply to almost 30% of global trade and GDP – more than either the European Union or the US-Mexico-Canada agreement
By bolstering China and creating more efficient supply chains within Asia, the RCEP will contribute to boosting global GDP over the coming decade
Against a backdrop of ongoing US-China tensions, the RCEP could strengthen Asian member nations
Following eight years of negotiations, the Regional Comprehensive Economic Partnership (RCEP) was officially signed by 15 Asia-Pacific countries in November 2020. Significantly, it creates a new economic bloc that covers about a third of the world’s population, and almost a third of global GDP and trade. To put this in context, it is bigger than both the US-Mexico-Canada Agreement and the European Union.
The pact will progressively remove both tariff and non-tariff barriers on trade in both goods and services. According to the Center for Strategic and International Studies, it will lower tariffs on imports by up to 90% within 20 years. On top of this, the RCEP also sets common trade rules within the bloc.
The RCEP unites the 10 members of ASEAN (Association of South-East Asian Nations) – which first proposed the RCEP idea about a decade ago – along with China, Japan, South Korea, Australia and New Zealand as free trade agreement (FTA) partners.
Chinese growth will have global impact
China is likely to benefit strongly from the deal, as it will face fewer barriers to exports into the rest of Asia. But other members within the RCEP may benefit even more. The ASEAN countries, together with South Korea and Japan, will likely find it easier to build their value chains.
According to a recent report from the Peterson Institute for International Economics, Japan and South Korea are also the two countries most likely to benefit in real GDP terms, each enjoying a near 1% boost to GDP. China and ASEAN members meanwhile are forecast to see a smaller 0.3% impact. The report also predicts that by 2030, the RCEP will boost global GDP by USD 186 billion.
What does this mean for investors?
The RCEP represents an important step towards broader regional integration within Asia, helping to strengthen the regional supply chain over the medium-term and setting the stage for closer economic integration. This translates into several key implications for investors:
The RCEP should foster deeper trade integration – and bring associated economic benefits. As a result, the systems involved in a cross-border production network will likely become more flexible, helping to enhance productivity, accelerate structural shifts and spur growth across the region in the medium term.
The closer relationship between trade and investment is expected to deepen financial market integration in the Asia-Pacific region. This should help ensure China’s trade with ASEAN member nations continues to outpace trade with other regions. ASEAN members will likely become further integrated into China’s supply chain.
The world’s dependence on Asia – and mainland China in particular – for components of all sorts, has only increased; simplified trade will mean both Chinese and US importers may import more from third parties such as ASEAN member states.
A unified “rules of origin” system under the RCEP should help reduce time and transaction costs as producers need fill out only one document to certify the origin of their products. This could also encourage firms to outsource some production to other countries within the RCEP for cost savings.
Perhaps most significantly, the RCEP signals that Asia is moving ahead with trade liberalisation. And from a global perspective, it reinforces the trend of the world’s centre of economic gravity continuing to shift eastward.
Chart: RCEP vs existing trade deals
Asia-Pacific countries sign world’s biggest free-trade deal
Source: Allianz Global Investors Global Economics & Strategy, November 2020.
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