January 2021

America’s Political Landscape Goes Blue: Wealth Managers React | Wealth Briefing

By Jackie Bennion

Wealth managers, economists and fund managers talk about the implications of the Georgia election wins in the Senate for the Democrats. The victories open up policy room for US President-elect Joe Biden.

The dismal scenes on Capitol Hill on Wednesday almost overshadowed the Georgia run-off results that have put the White House, Senate and House in Democratic hands for the first time since Barack Obama entered office in 2009. The results initially rattled markets as much as the mob rule engulfing the capital monopolised TV coverage.

Goldman Sachs chief executive David Solomon took to LinkedIn to express the need to restore goodwill in US public life. “It’s time for all Americans to come together and move forward with a peaceful transition of power. We have to begin reinvesting in our democracy and rebuilding the institutions that have made America an exceptional nation,” he said.

Consensus is that Senate control will pave the way for higher taxes, at least in the medium term, to pay for the COVID-related damage. Economists also predict a more expansive stimulus because of the shift to the Democrats. Tougher regulations are also anticipated, such as for Big Tech. The tech-heavy Nasdaq was hit yesterday. By contrast, wealth managers are upbeat about green-linked sectors, given that they think a Biden administration will squeeze carbon energy.

Here is a collection of views from industry analysts and wealth managers.

Goldman Sachs revised its forecasts today. “With control of the Senate by a narrow margin, Democrats are likely to pass further fiscal stimulus in Q1 that we expect to total about $750 billon, including $300 billion in stimulus checks. However, discouraging news on the virus front – including the slow pace of vaccination and the emergence of more infectious virus strains – suggests that the spending boost from stimulus will be more lagged than usual.”

Outside fiscal policy

"Other legislation would likely need 60 votes to pass in the Senate; more than one Senate Democrat has already publicly opposed eliminating the filibuster. This means that bipartisan support would still be necessary to pass legislation on issues like infrastructure, a minimum wage increase, tech regulation, and environmental policies,” Alec Phillips from GS research said.

In his morning brief, Deutsche Bank’s Jim Reid noted that the Georgia count gives Biden more flexibility in appointing senior positions as the Senate approves a raft of posts, including the cabinet, ambassadors, judges and the Federal Reserve Board of Governors.

Asian markets moved higher overnight, with only Hong Kong's Hang Seng index (-0.38 per cent) down on news that the Trump administration may bar investments in China’s Alibaba Group and Tencent. “Investors might have difficulty unwinding their positions in these companies if this indeed happens as at $1.3 trillion, the combined market value of their primary listings is nearly twice the size of Spain’s stock market, while the firms together account for about 11 per cent of the weighting for MSCI’s emerging markets benchmark,” Deutsche's Reid said.

Global stocks have largely shrugged off chaos in Washington; this was the view of chief market strategist at FXTM, Hussein Sayed.

“The scenes that played out in real-time across global cable television did nothing to alter expectations of the near to mid-term political and economic outlook… President-elect Joe Biden will push hard on reviving stimulus and that is why we are seeing small caps and cyclical stocks outperforming growth. Yields on US 10-year Treasuries are up 13 basis points from Monday’s close, hovering around 1.05 per cent, the highest level since March. Meanwhile, the dollar remains stuck near three-year lows as rising debt levels, along with low interest rates, are expected to keep putting downward pressure on the Greenback."

Manager of M&G’s Climate Solutions Fund, Randeep Somel, believes that the election results will give Joe Biden's and House speaker Nancy Pelosi’s policies more headroom, especially on climate action.

Biden campaigned to increase corporate tax rates to 28 per cent (from 21 per cent) and raise income taxes for those earning more than $400,000.

While corporate tax rate hikes are not guaranteed, Wednesday's Senate results makes it more likely. “US futures have reacted slightly negatively to the news so far,” M&G’s Somel said. He also agreed that the outcome will turn the heat on those US technology companies under House investigation last summer for uncompetitive practices.

Climate boost

The key long-term opportunity for the Biden administration though is moving climate policy many analysts suggest.

“Biden campaigned to take the US back into the Paris Climate Agreement, but this action would have largely been symbolic without policy, something the Republican Party have not shown signs of ceding ground on,” Somel said.

He also campaigned for a clean energy revolution, which includes $2 trillion of federal spending over a four-year term, which is more likely now that Democratic spending won’t be blocked by Senate Republicans, he said.

Somel sees Democrat control “significantly escalating” renewable energy for electric power generation, and getting to some of the ambitious emissions-free power targets set for 2035. It should also spur four million building upgrades to meet much tougher energy efficiency standards, and stimulate electric vehicles adoption, he said. The US government is also offering tax incentives to replace older cars and funding around 500,000 new EV charging stations.

"Biden has consistently expressed his dismay that it is China rather than the US leading the world in green technology, especially in electric vehicles. Hopefully, the next East-West arms race will be to see who can develop an economy best equipped to reach net zero,” he added.

Wealth and estates

Looking at how the new majority affects taxing the wealthy and their estate planning strategies, Jim Bertles, managing director of Tiedemann Advisors, in Palm Beach, Florida, said that high net worth individuals can expect to see major changes.

“With a Democrat majority in the Senate, there is a strong chance that gift, estate and generation-skipping taxes will increase, while exemptions will decrease. Additionally, some prior proposals restricting the benefits of some estate planning strategies such as GRATs, family discounts and potentially grantor trusts may gain traction. The biggest question is when these changes will come. Some think 1 January 2021, some think mid-year and a growing group think 1 January 2022. We expect to see another rush of planning before then – similar to what we saw ahead of the presidential election,” Bertles said.

Mohammed Kazmi, portfolio manager for UBP’s absolute fixed Income team, believes that Democrat control will boost confidence that the recovery will continue in 2021.

“The vaccine rollout as well as now increased fiscal support should mean that any slowdown in Q1 growth will be a temporary blip, rather than anything more permanent or sustained. We have positioned as such, holding curve steepeners and short duration views in our absolute return funds as we anticipate that such reflation trades have further legs in the near term as the vaccine rollout and fiscal support will take us closer to a normalisation in activities as the year progresses."

Bad news for bonds?

As far as how results affect bonds, Eric Vanraes, portfolio manager at Eric Sturdza Investments said: “A 100 per cent Democrat victory (and unified control of Congress and the House) means that the “leftist” part of Joe Biden’s programme could eventually be implemented. This is bad news for bonds, but nothing has really changed since 4 November when we knew that a huge blue wave at the Senate was unlikely.

"Biden will most likely implement a centrist policy (probably slightly more “leftist” than Clinton and Obama) and, although the bond market’s reaction is understandable, it seems a bit exaggerated. The most important factor, we believe, is the behaviour of the Fed and the beginning of a kind of cooperation between Chair Powell and Janet Yellen (Secretary of Treasury), with the aim of restoring inflation."

Investment strategist at Brooks Macdonald, Matthew Cady, said the Georgia results might be a double-edged sword for markets.

“On the one hand, it could make an additional and larger fiscal stimulus in Q1 more of a possibility and with it a greater emphasis on infrastructure spending, which will provide greater support for markets as the US continues to face headwinds from the COVID-19 pandemic. On the other hand, further out it could also raise the chances of tax rises, tougher regulation and other less market-positive reforms,” he said.

Cady also argued that the pandemic will continue to dominate political priorities, and tax rises unlikely while the US economy is still being judged in recovery mode. There is also the US political cycle to consider. “Mid-term elections are less than 2 years away in November 2022, and the Democrats will be wary of risking unpopular policy changes for fear of losing control of the Senate especially should they have just won it,” he said.

Investment implications

“The new Congressional composition only furthers my argument that cyclical, value and small cap stocks should outperform in 2021 due to both a valuation catch-up and a greater fiscal stimulus in the year,” Inveso’s global market strategist for Asia, David Chao, said.

“Technology stocks could underperform in the near-term due to a perceived higher corporate tax rate and stricter regulation.

“The most likely priorities will be an additional round of stimulus to help out states and municipalities - which were left out in the most recent economic aid package - and increasing the direct payment to $2,000 per person and extending unemployment benefits."

Dollar fortunes

Another area to watch is the US dollar, said James Athey, investment director at Aberdeen Standard Investments: “Shorting the Greenback is one of the market’s biggest consensus trades for 2021. A positive US-specific growth boost coupled with rising US yields isn’t normally a combination we would expect to see driving the currency lower.

"Should the dollar do an about-face it will provide some welcome relief to the world’s exporters but it might not be so welcome in financial markets which often associate a rising dollar with periods of risk off. That association is very often a self-fulfilling prophecy.”


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