6 October 2020

Trading a Biden victory

Biden is leading in the polls but is not certain of victory.

by John Royden

Head of Research


He needs 270 Electoral College votes to win and can be fairly certain of collecting 259.  That means that he needs just 11 of the 136 “uncertain” votes to win.  The uncertainty is reflected in the betting odds, with  RealClear Politics having Biden with a 54% chance of winning and Trump with 46%.

On a general note, Biden says that he is going to increase corporation tax from the current 21% to 28%. I have seen an analysis of corporate tax rates with stock market performance and am drawn to the view that the tax rate is not as important for stock market values in practice as corporate finance theory would otherwise suggest. I think the S&P 500 will weather the tax increase in the medium term.

Biden also proposes raising the top individual income tax rate to 39.6%, up from 37%. Those with incomes exceeding $1 million could see long-term capital gains tax rates rise to 39.6%, from 20%. Will that hit the stock market? Bearing in mind many listed securities are held in tax exempt accounts, I would be surprised if the impact was material.

If you think Biden is going to win then the idea with most appeal is to exit all those long term winning healthcare stocks. Medicare is a federal health insurance program for Americans over age 65 and certain people under age 65 who have qualifying conditions or disabilities. "Obamacare" is a nickname for the Patient Protection and Affordable Care Act of 2010 which can be thought of as extending the scale and scope of state provided medical care and assistance. Biden, and many other Democrats, have aspirations for something closer to a national health care system in the US and the profits of healthcare companies are an easy target for the source of funds to pay for it all.

We expect the Democratic lean towards greater fiscal support to push the national debt higher relative to what it would have been under the Republicans.  As I write the “bid / offer” spread in terms of what the two parties consider appropriate for the next level of COVID-19 fiscal support sits roughly at $1 trillion (Republicans) vs $3 trillion (Democrats) and illustrates the Democratic proclivity to spend more.

This means higher interest rates under a Democrat administration.  Higher rates are a negative for consumer staples and so do not expect this sector to add any excess return to your portfolio under a President Biden.

The Democrat winning sectors are likely to be Materials, Industrials and Financial Services. The extra fiscal stimulus, discussed above, is going to push inflationary demand for basic materials and they could do well. 

I am cautious about how much electioneering talk could move promises of infrastructure spending into reality. If Biden promises infrastructure investment and you believe him, then the industrial sector that is exposed to infrastructure spending should surprise on the upside. That is more the case if fiscally prudent Republicans lose the Senate.

The oil and gas sectors are probably rooting for Trump. Biden and the Democrats are the natural home for more green orientated policies; and companies with hydrocarbons at the center of their business plans could suffer. There is mention of Biden trying to agree to some kind of global carbon tax.

As discussed in my article on how to trade a Trump win, I think the less fiscally prudent Democrat administration could allow much greater spending and a much greater budget deficit.  That would scare investors and they would demand higher returns for holding US dollars. Goldman Sachs think you will see 35 basis points (bps) on the ten-year yield with a Biden victory that includes the Senate. That is another way of saying expect higher interest rates under a Democrat and with it banks and insurance companies to do better.

In terms of what this means for the UK, there is the thought that the harmonisation of US and European tax rates could bring the continents together and make it easier for the UK to sign non-conflicting trade agreements with both.

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Please remember that your capital is at risk and the value of investments can fall, therefore you may get back less than you invested. The views expressed are those of the author.


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