Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 382

Perpetual: Biden impact not as important as China for Australia

For a view of the US election result and the effect on the stock markets and the economies of the US and Australia, we’re talking with:

  • Kyle Lidbury, Head of Investments Research, Perpetual Private
  • Amanda MacDonald, Investment Specialist, Perpetual Private
  • James Holt, Senior Investment Specialist, Perpetual Investments

What does a disputed election mean for the stock market?

Amanda: The biggest risk to markets is a contested result. The likelihood of increased volatility is really dependent on that scenario happening.

James: Markets like certainty. People want a decisive result – either a blue wave or red wave. If it’s a contested result, the big fear is that it will be a [year] 2000 type result which came down to one state – Florida – and went on for weeks and eventually came down to hanging chads and only a handful of votes.

Amanda: And coupled with all the other risks in the US at the moment, social unrest, the pandemic – these will all add up along with a contested result as increasing the likelihood of more volatility and bad news for the stock market at least in the short term.

James: One flip side for volatility, a positive, there may be more opportunities for active investors.

When the market has a big rally like we’ve had and there is an expected clear result with Trump and taxes stay low, or an expected clear result with Biden and he spends up – either way is a good scenario but if they don’t know which it’s going to go is negative. It’s also worth remembering there are two elections that are important today – there’s also the senate.

Kyle: With a split vote between the Presidency and the Senate could also increase uncertainty as legislation is stalled in the senate.

Would a Democrat or Republican victory be better for the stock market in 2021?

Kyle: The US stock market is pretty divergent to all markets, including the Australian market, at the moment largely to do with technology. That is one of impacts of the COVID-19 crisis, which have made real winners and losers from the crisis. Certainty around earnings for tech stocks on the US market is driving their valuations up and up, while other sectors – without that certainty of earnings – have not performed well.

One thing that is really affecting us [Australia] from a ‘future prospects’ perspective is the current state of the Australia-China relationship, which is poor. You’ve seen several industries come up against fairly hefty barriers, including copper, barley and now even lobsters. Education and tourism are also affected – both top 5 exports for our country. Our strength is iron ore, which so far has not been affected.

Together with these other industries, there’s no doubt this helped us through the GFC and why we avoided a recession. The risk of lack of Chinese support, that’s more of a headwind for us that the US election.

As a result of the US election, I don’t see there will be much change from the US perspective. The China trade war – the hemming in of China has bipartisan support and won’t really change as a result of who gets in.

James: Over the long term it doesn’t matter who is the President. For over 200 years, the country has thrived under different presidencies. In the short term, Biden might give the economy a net boost – if there’s a clear result one way or the other, the markets will move on pretty quickly.

Kyle: One thing to note is that the tech stocks have dimmer prospects under Biden. There are elements of the Democratic party that want to break up those companies.

Amanda: Generally, with less pressure from regulation [than] under a Biden presidency Tech stocks will likely continue their divergence from the rest of the market.

James: Tech stocks are pretty richly priced anyway, even before COVID; and they’ve come out of COVID-19 pretty even more so from that perspective it’s worth noting that once you get these elections out of the way things return to basic fundamental, they’re probably ripe for rotation.

Do politics really matter when it comes to stock market performance after an election?

Amanda: The year after an election the incumbent president tends to show a more positive return.

Kyle: Historically, evidence points to returns being better under a Democrat presidency – but with a split congress.

James: True - we saw that in the late 90s when Bill Clinton was President. Republicans were in control of congress and cut spending and kept tax low and Clinton was the President acting as centrist between the left-wing Democrats and the right-wing Republicans. Funnily enough if the Democrats win the Presidency and the senate stays Republican that might be the best result as businesses can take more confidence that there will be fewer changes in the law and be more confident to invest and get on with business.

Democrats and Republicans will take the US economy in different directions. What should we look for and what market sectors will benefit from a Democrat or Republican victory?

Kyle: There’s a lot that will be similar, but there are some differences. Both candidates have stated a desire to spend on infrastructure for example. However, Biden has said it will be around green initiatives such as renewables and environmental. Some stocks have rallied quite strongly on that prospect.

In terms of trade, there won’t be a significant amount of difference as we’ve talked about that.

Trump has talked a lot about bringing jobs back to America, but he’s been less successful on that than he might like to think despite the tariffs and other things. There’s a lot of data that says there was economic stimulus but it was largely through the tax cuts that were passed, but what that did was hide a contraction that you saw from the reduction in trade as a result of the trade war.

Even though the economy grew – it could have grown much more strongly if there was more harmonious trade.

James: The funny thing with the Democrats is that they’ve jumped on the trade bandwagon as well so we shouldn’t expect much difference under the Democrats – even if the Democrats are more diplomatic about it.

How will ESG investments be affected by either President?

Amanda: Biden has laid out quite a clear plan for his clean energy revolution with a net zero emissions target by 2050. As Kyle mentioned previously Biden has indicated to put $2tr into green infrastructure over four years. Trump doesn’t focus on climate change and has made no clear plan towards a greener future for the US.

From an ESG perspective, companies that have exposure to renewable energy sources and innovations will probably perform better under a Biden win. And Biden has also stated his intent to re-join the Paris climate agreement.

What advice do you have for investors and their investment portfolios regardless of the election result?

James: Keep your long-term plan in place. Don’t make any rash decisions in the short term – remember elections come and go and economy moves on and you should base your investment decisions on that.

Kyle: Yeah, trying to position your portfolio for the outcome of an election is folly, particularly when it’s close or contentious. At the end of the day it doesn’t have much of an effect on markets as people would think.

The other side of things, is that, looking back to 2016 and Trump’s victory – what was widely expected to be a negative for markets turned out to be quite positive. Even if you get the result right, it may not have the effect you expect. When you can’t make high conviction bets, it’s just important to be broadly diversified in a portfolio that is positioned for a variety of different outcomes and you don’t have all your eggs in one basket.

 

Perpetual Investments is a sponsor of Firstlinks. This article contains general information only and is not intended to provide you with financial advice or consider your objectives, financial situation or needs.

For more articles and papers from Perpetual, please click here.

 

3 Comments
Eye
November 09, 2020

China has little need of Australian lobsters, wine, barley, etc. China has significant reserves of iron ore but would prefer to use Australia's reserves while still available. With around 500 vessels the People's Liberation Army Navy is considerably larger than the US fleet, with the equivalent of an entire British Royal Navy being added every couple of years. At 40% of global ship-building capacity China is significantly out-producing Japan or South Korea and Xi Jinping is now accelerating the buildup of the PLAN while exhorting his troops to "prepare for war". In keeping with the Chinese Communist Party's long term strategy to bring down the USA and become the world's predominant superpower before 2049 Australia's iron ore will have a significant role to play. Ref:
'The Hundred-Year Marathon' by Michael Pillsbury: https://www.youtube.com/watch?v=7HnNEIkxzCc
'Stealth War' by Brig. Gen. Robert Spalding: https://www.youtube.com/watch?v=h8IEtlOVzq4
'Trumps Biggest Failure' by Kraut: https://www.youtube.com/watch?v=hhMAt3BluAU

Joe
November 11, 2020

There is another culture other than imperialistic one you have yet to understand. Don’t be xenophobic and psycho by the mobs.

biggusriggus
November 12, 2020

There is nothing xenophobic whatsoever about keeping abreast of the broader political climate, especially with respect to national interests. After all, that's how many of us Australian's ended up living here in the first place. It would be completely disingenuous to suggest that two nation states share the same objectives. Appreciate the recommendations.

 

Leave a Comment:

     

RELATED ARTICLES

Capital Group: What the U.S. election means for investors

MFS Investments: Blue wave fails to reach shore

The 2020 US presidential elections

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require trustees - even SMSFs - to offer a retirement income product to protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.