The essential
Joe Biden has a historically large lead over President Donald Trump in the polls, including in the critical electoral college vote, but that could narrow closer to the election.The slide in Trump’s approval rating was most noticeable among senior citizens and he has not led in a single major poll so far this year, though it should be noted that polls have proved unreliable in the past few elections. To put Biden’s lead in perspective, no prior candidate or President has seen a lead this large at this point of the race. However, Trump still holds onto slightly favourable ratings on the economy. A game changer could be the Democratic party taking control of the Senate, which appared unlikely early this year. The market is not yet pricing in risks associated with a potential Biden presidency and/or Democratic sweep of Congress. Market volatility could rise if the likelihood of this scenario increases as the election gets closer. Biden’s agenda would have sweeping implications for every industry and sector of the economy, with significant investment fallout. His tax plan would reduce corporate earnings significantly. He also plans to expand access to healthcare and support minority communities through a new affordable housing programme. He may keep a tough stance on China, though with less harsh rethoric than Trump, and launch a new infrastructure programme. On US fixed income, it is with the understanding of the risk posed by the election outcome that investors should build fixed income portfolios. Careful credit selection is critical, identifying companies with strong balance sheets, financial flexibility, resilient business models and ample liquidity. Diversification is also key within corporate bonds and other fundamentally stable sectors, such as securitisations across residential, consumer loans, and commercial loans. We believe US Agency mortgage bonds and TIPS can be good substitutes for richly valued US Treasury bonds to provide stable liquidity in portfolios. With an unknown administration taking office after the election, and the unpredictability of fiscal policy and the path of economic recovery, interest rate risk is best neutralised. On US equity, Biden’s tax reform would reduce our S&P 500 earnings estimate for 2021 by roughly $20 per share, from $170 to $150. As a rule of thumb, every percentage point change in the effective corporate tax rate should change S&P 500 earnings by 1.2%, or $2 per share. The Biden plan would only reverse half of the Tax Cut and Jobs Act cut to the statutory domestic tax rate. Along with the other proposals we estimate it would lift the S&P 500 effective tax rate to 26%. A reversal in the reduction of regulations during the Trump administration may hurt financials, big tech, energy, healthcare, and any labour-intensive business the most. Longer term, larger industry incumbents with strong competitive positions can most easily absorb increased regulations and pass on increased costs. Past examples of this include tobacco, utilities, managed care, and defense.
