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16 Oct 2024

The US Presidential Election: What Investors Need To Know

As the US approaches its presidential election, the stakes extend far beyond political leadership — the economic ramifications are substantial and global in reach. With Vice President Kamala Harris leading former President Donald Trump in national polls — albeit with razor-thin margins in key swing states — the potential policy shifts could significantly impact markets, taxes, regulations, and investment strategies. Foord Singapore portfolio manager BRIAN ARCESE looks at key investment themes facing the presidential candidates and how the election outcome could move markets.

INFLATION

A key election theme has been the level of US inflation, which is also a central focus for investors. Recent data suggests a continuation of disinflationary trends, primarily driven by a slowdown in shelter inflation, which accounts for nearly one-third of the US Consumer Price Index. Forward-looking indicators suggest continued deflationary pressures from shelter inflation in the coming months.

However, looming risks could disrupt this trajectory. The recent strike by dockworkers on the US East and Gulf coasts — which handle 50% of incoming ocean-going cargo — threatens supply chains. While the immediate inflationary impact may be minimal, a prolonged disruption could exacerbate inflation, underscoring the need for interest rates to stay higher for longer. High inflation and higher interest rates are an anathema to presidents and investors.

INTEREST RATES AND THE FED’S BALANCING ACT 

The US central bank has started its easing cycle, implementing a sizable 0.5% rate cut while maintaining a balanced outlook. The US economy certainly looks to be moving towards a ‘Goldilocks’ scenario — neither too hot, nor too cold — recording a 3% annualised GDP growth in the last quarter with inflation moderating to 2.7% year-on-year. Yet, despite robust growth, the labour market is showing signs of cooling.

Historical precedents from 2001 and 2007 suggest that rate-cutting cycles starting off with half percentage-point rate cuts (as is the case today) were followed by significant increases in unemployment and subsequent recessions. As the Fed shifts its focus to employment metrics, upcoming labour market data will be critical in determining the pace and extent of future rate cuts. The candidates — and investors — may unexpectedly face a US recession early in their term.

EARNINGS OUTLOOK: GREAT EXPECTATIONS   

Corporate earnings remain a cornerstone of investment valuations. While earnings expectations have moderated, they are still optimistic. Consensus estimates predict 11% earnings growth next year for US markets. This optimism persists despite cautionary signals from leading economic indicators, such as rising auto loan delinquencies, slowing housing starts, and a softening labour market.

US markets are currently trading at valuations approximately 20% above their long-term averages. This premium suggests that investors are pricing in high growth expectations, which may be challenging to achieve. The combination of lofty valuations and potential economic headwinds suggests the need for caution.

THE CHINA PERSPECTIVE   

In contrast to the US, Chinese equities are trading at historically low valuations. Chinese policymakers have launched a series of monetary, fiscal, and regulatory measures to address economic pressures. These include cutting reserve requirement ratios, reducing policy rates, and introducing new monetary tools to stabilise equity markets.

While these initiatives may not reverse China's economic slowdown entirely, they aim to prevent further deterioration. Investment portfolios with significant exposure to Chinese equities have reaped the benefits. However, China’s trade policy is in the crosshairs of both presidential candidates.

DIVERGENT POLICY PATHS: HARRIS VS TRUMP 

In general, US presidential elections do not materially drive markets. However, there are four areas of divergent policy that will affect corporate profitability and investor returns: taxation, regulation, tariffs/trade and energy. 

TAX POLICIES 

Two major pieces of US tax legislation are in focus: the Tax Cuts and Jobs Act (TCJA) of 2017 from the Trump presidency and the Inflation Reduction Act (IRA) of 2022 during the Biden term. The TCJA — which reduced the corporate tax rate from 35% to 21% — is set to expire at the end of 2025. A Trump presidency will prioritise extending the TCJA, maintaining current tax rates and providing continuity for businesses.

Conversely, a Harris administration might allow the TCJA provisions to expire, leading to higher corporate and individual tax rates. This shift could result in a 66% increase in corporate tax rates, significantly impacting after-tax earnings and investment capacity. If Democrats wrest control of Congress, more aggressive tax reforms could include higher capital gains taxes and increased taxation on share buybacks and executive compensation.

The IRA focuses on reducing greenhouse gas emissions by 40% by 2030 by offering substantial tax credits for clean energy initiatives. A Harris victory would likely preserve these incentives, fostering investment in renewable energy sectors. In contrast, a Trump administration might scale back these provisions, potentially slowing the growth of domestic clean energy projects.

REGULATORY LANDSCAPE 

Regulation is another area where the presidential candidates diverge, particularly concerning financial institutions and technology companies. In the financial sector, a Harris presidency might reinforce the adoption of Basel III capital requirements, compelling large banks to increase capital reserves, and potentially lowering returns — a win for regulators. A Trump administration would likely favour deregulation, easing capital requirements and possibly enhancing profitability for financial institutions — a win for shareholders.

Both candidates are critical of big tech. A Trump victory would probably maintain the current administration's efforts to limit the dominance of big tech companies — seen as overly woke — through antitrust actions. While a Harris administration might continue scrutinising these firms, analysts anticipate a more balanced approach — potentially leading to settlements in less substantiated cases involving industry giants like Apple and Amazon.

TARIFFS AND TRADE   

Both presidential candidates are advocating for aggressive trade measures against China, signalling a bipartisan shift toward protectionism. The Biden administration — and Harris by extension — has proposed a 100% tax on Chinese electric vehicles and restricted semiconductor exports, while Trump suggests a 60% tariff on all Chinese goods and a 10% tariff on all imports. 

These policies aim to counter China's rapid industrialisation and dominance in manufacturing clean energy products. However, such tariffs may not achieve the intended goal of revitalising domestic industries, as China's vast scale and significant domestic market enable it to remain a leading global manufacturer despite trade barriers.

Imposing high tariffs could also lead to unintended consequences, such as making domestic industries complacent and less competitive globally. They could also be inflationary for the US.

ENERGY POLICY     

The presidential election will significantly impact global energy markets due to the candidates' differing energy policies. A Harris administration is expected to continue President Biden's focus on renewable energy and initiatives like the IRA, accelerating the transition to clean energy. Conversely, a Trump presidency might revert to pro-drilling and less environmentally focused policies, potentially increasing domestic oil production. This could alter oil price dynamics over the next five years, benefiting oil service companies in the near term, but potentially hindering global efforts toward net-zero emissions.

Regardless of who wins, larger global forces will influence energy markets. Europe's attempt to reduce reliance on Russian energy has tightened supplies, and OPEC is cutting production to maintain high prices. Meanwhile, non-OPEC producers like US shale oil are experiencing flattening output. The shift toward green energy introduces new geopolitical challenges, as China controls much of the supply chain for critical raw materials needed for renewable technologies. This control could complicate the transition to clean energy, especially if trade tensions escalate. Therefore, the election outcome will not only shape US energy policy, but also have far-reaching implications for global energy markets and resource geopolitics.

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