Joe Biden looks set to clinch the prize and become the next US president, despite threats of recounts and lawsuits from the Trump campaign. The dollar was volatile on election day, but stocks rose steadily and continued to rise once the result became clearer. The incoming administration will be looking to inject fresh stimulus into the world’s largest economy, with an emphasis on Democratic themes like green energy and healthcare reform. However, with no working majority in the Senate, and the post-Trump Republicans likely to return to their demands for small government, the Democrats may find they have less fiscal firepower than promised on the campaign trail.
Away from the immediate stimulus, Biden will be looking to undo many of Trump’s policies. We will likely see a less adversarial approach to Beijing and a more multilateral approach to international trade in general. This is good news for large US companies with global supply chains.
Domestically, the Democrats will push for minimum wage increases and a stronger social safety net. The party says this can be funded by reversing Trump’s signature tax cuts, but whether this can get through the Senate is another story. Higher corporate taxes would be a drag on corporate earnings, and therefore the S&P 500. Biden is a centrist Democrat, however, so even if successful, it is unlikely we will see tax rates far above their pre-Trump levels.
The UK’s new lockdown came into force on Bonfire Night. The pound weakened after the initial announcement, as investors anticipated a hit to the UK’s economic fortunes. In response, chancellor Rishi Sunak extended the furlough scheme, and the Bank of England said that it will continue to buy bonds to finance the government’s yawning deficit, which is running at around 20% of GDP. The Office for National Statistics reported that the UK’s debt pile has now exceeded the size of the economy for the first time since 1960.
Staying in the US, a House subcommittee published its investigation into the dominance of Big Tech. The 450-page report focussed on four companies: Apple, Amazon, Facebook, and Alphabet. The investigation found that all four had engaged in anti-competitive behaviour and formed effective network monopolies. While intended to pave the way for antitrust lawsuits, the report could also be read as making the investment case for each company.
Investor fear over antitrust rulings is overdone if history is anything to go by. Microsoft delivered stellar returns since its own antitrust suit in the 1990s, and even the forced breakup of AT&T’s telephone monopoly in the 1970s benefitted shareholders, by unlocking the value of divisions that had been neglected inside the conglomerate. Our view on technology stocks therefore remains positive.
China was one of the only positive markets in October, buoyed by survey data showing the strongest manufacturing growth in nine years. The rise was thanks to strong domestic demand, boosted by an extra public holiday in October. Exports were weak, however, as battered Western consumers lost their appetite for Chinese goods. The IMF projects China to grow by 1.9% this year, the only major economy to expand. We remain slightly overweight China in our Tactical portfolios and our investors have seen the benefit of this over the month.
Most major western European countries instituted new rules or lockdowns in the face of the second coronavirus wave, albeit less strictly than in the spring. The renewed restrictions hit European stocks, with the blue-chip Euro Stoxx 50 index falling more than 10% in the second half of October, although they have since mostly recovered in the early part of November.
Japan’s new prime minister, Yoshihide Suga, launched a fresh stimulus package of almost $100bn. Economists are concerned about the timing of the new stimulus, which could provide a sugar rush today, but merely steepen the fiscal cliff once emergency measures are withdrawn. The world’s third-largest economy has already piled up debt twice as large as its GDP. However, Japanese citizens are prodigious savers, and the country continues to enjoy low-interest rates and a safe haven currency status. The economy remains more robust in these coronavirus times and we remain slightly overweight in Japan across our portfolios.
In style and character, President Biden will be far removed from his immediate predecessor. For investors, however, many of the themes of the last few years remain unchanged; ultra-low interest rates, mounting debt, the rise of China, the burgeoning power of Big Tech, and of course the coronavirus crisis. Short term, if the Democrats are successful in rolling back Trump’s tax cuts, we expect it to drag on US equities. In the long term, we expect America’s loose fiscal policy to be bearish for bonds and bullish for equities and other inflation-driven assets, such as gold.
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