After weeks of dramatic debates, we’re nearing the end. The US Presidential Election will be held next Tuesday.
If you haven’t been keeping tabs, here’s a quick summary of their plans:
Trump VS Biden
Here’s a summary of Trump and Biden’s campaign themes, courtesy of MRB Partners Inc:
And here’s a summary of their budget plans:
In a nutshell, Trump’s focus is on keeping the U.S. stock markets up while Biden’s focus is on improving and strengthening the U.S. economy, mainly by increasing tax.
In his term, Donald Trump has printed USD $6 trillion. If Biden wins, he intends to spend about US$11 trillion, which means there’ll be more money printing.
Do note that the biggest takeaway here is that the amount of debt is going up. All the money that’s being printed now cannot be removed from the economy.
All the excess money flooding into the global economy will inevitably lead to inflation. This means the worst thing anyone can do is to keep cash. learn to deploy your cash. (this could be why cryptocurrency has been going up too.)
Regardless of who wins, make sure you know how to deploy your cash strategically!
Potential Outcomes for US Presidential Election
There are 6 possible outcomes, as summarised by UOB:
What the statistics suggest
Polling Data
As of 21 Oct 2020, the Polling Data shows that Biden has a 9-point lead, which is very significant.
However, based on the previous presidential election, Hillary had a 4-point lead but ended up losing to Trump eventually.
Hence, many are not confident about the statistics from the Polling Data.
Betting Markets
Yes, there are people putting in real money bets on the presidential election outcomes.
Betting markets show a widening lead for Biden (at 70%), as of 13 Oct.
Since gambling odds are derived from people putting money where their mouth is, this could be a more accurate reflection of the potential outcome.
Election Models
Likewise, the latest election models also suggest that Biden is leading.
2 Most Likely Outcomes
Based on the current trends and statistics, it seems we can narrow down to two potential outcomes for the US Presidential Elections:
- Scenario 4: Biden wins. Democratic retains House and wins Senate. (Blue Wave Victory)
- Scenario 6: Biden wins. Democratic retains House, Republican retains Senate.
Covering all 6 scenarios is not possible in a single article, I’ll take my chances and focus on the two most likely scenarios.
Both scenarios are of a Biden victory.
What does this mean for investors?
If we experience a Blue Wave victory (i.e. scenario 4), the democrats are likely to implement public spending policies across various sectors quickly. Biden may also roll back corporate tax cuts that Trump has rolled out recently.
However, in the event of Scenario 6, the Democratic Party may not be able to increase their spending as planned. This may slow their recovery.
Which sectors could do well?
Looking at the Federal Budget Impact (see budget plan image above), you’ll notice that Biden intends to spend a significant amount on ‘Infrastructure and Other Domestic’ segments.
I think the following segments will benefit from a Biden win:
- Infrastructure
- Green Energy
- Energy storage
In fact, the markets seem rather confident of a Blue Wave victory, we are seeing its effect in the markets and especially on green stocks.
If you are equally bullish on a Biden victory, here’re 3 ETFs that you may want to look into:
- Infrastructure: iShares Global Infrastructure ETF (IGF)
- Green Energy: iShares Global Clean Energy ETF (ICLN)
- Energy storage: Global X Lithium and Battery Tech ETF (LIT)
Impact on Chinese stock market
Currently, China seems to be leading in technology and green energy. Both Biden and Trump would be looking to slow restrain China’s growth and fight for leadership in various sectors.
However, unlike Trump, Biden is more likely to be collaborative and seek common ground with the Chinese. His victory could provide temporary relief on Chinese equity.
The market is also hopeful that he may roll back the tariffs on Chinese companies.
Impact on US Dollar
Analysts expect a negative impact on the US dollar, given a higher likelihood of less combative foreign and trade policies, coupled with larger fiscal stimulus packages.
That said, do note that markets tend to be more volatile before elections, this could lead to a stronger dollar index than usual, in the short term.
Impact on the Bond Yield and Inflation
The potential fiscal stimulation could increase the gap between yields on short term bonds and long term bonds.
At the same time, never before has the US deficit reach such numbers ($3.6T):
And it’s not only in the U.S.
Across the globe, governments are printing money as well, with the exception of China.
In fact, China has been managing their Renminbi very well. So much so that its value against the USD has been increasing:
In fact, fund managers seem to be taking note of these. I expect more investments into Chinese equities if the US/China tensions subside.
In the long run, inflation is inevitable.
Impact on Technology
Biden is likely to enact new anti-trust laws, which could affect FAANG negatively.
At the same time, his potentially large fiscal package that could give a boost to unloved value stocks. If this happens, U.S. investors could start shifting their money from tech stocks to small cap companies.
If we looked at a recent chart, the multiple tops suggest that it is testing the high but have failed to break through. Based on history, this could lead to a major drop.
In my opinion, I think big tech companies have reached their peak in the short term and that their high valuation may not hold.
Impact on Health Care Sectors
Likely to expand Affordable Care Act to improve access to health care.
This could positively impact the pharmaceutical markets.
Covid-19 situation in US
Infection rates are going up, but fatality is starting to decline.
However, the increasing infection rates will affect Trump’s chances of winning.
That said, the US is unlikely to go back into another lockdown.
Vaccine situation
Currently there are six vaccine candidates in phase 3 testing.
The question is no longer about “whether we will have vaccines”, in fact, we will have plenty of vaccines. The question is whether the vaccine can be manufactured for a global scale distribution. And for investors, which ones will be the market leaders.
These are the top candidates:
Sinovac is already being distributed in China.
Covid-19 Testing situation
While vaccines are being worked on, we should also focus on the test kits in the market.
At the moment, there are 2 types of tests;
- Polymerase chain reaction (PCR): highly accurate, but slow
- Antigen: less accurate but quicker.
I think it’s wise to look out for advancements in Antigen testing going forward.
Today’s Market Sentiments
Personally, I’m bullish about the markets beyond 2020. If this holds true, we would see:
- economy recovering faster than expected
- fiscal stimulus and reinvestments done to allow economy to recover even stronger than pre-Covid levels
- successful vaccines being rolled out
- long term low interest rate environment being sustained
- reduced risks of further uncertainties such as US /China tensions, mismanagement of inflation, vaccine failures
There’re two sides to the coin. Those who are pessimistic may hold a bearish sentiment. In such scenario, these could occur;
- elevated US-China decoupling
- new virus set backs
- possible financial crisis in emerging markets
And of course, the world isn’t a textbook, things are not black and white. We could have a combination of events happening.
As investors, we cannot fully predict how things will unfold but we can do our best research to make the best decisions for our portfolio.
Conclusions on Market Recovery
No one can predict the future but this is my view.
I believe we are in a K shape recovery where certain sectors do better than others:
During Covid-19, we saw sectors like e-commerce, technology, gaming and pharmaceuticals doing well.
However, once the vaccine is released, people will be free to travel and head back to work. When that happens, we will experience another evolution in consumer behavior. This could likely create a void in sectors that have benefited from Covid-19 previously, affecting their performance going forward.
On the flip side, industries like travel, airlines, hospitality were negatively impacted by Covid-19. They would experience a significant but slower recovery once Covid-19 has passed.
Of course, this is not likely to happen in the next 1-2 months, but a Biden victory may hasten recovery for lagging sectors.
Conclusions on Short Term Market Movements
I believe that the market will be bullish as we go into the election and even after the election.
Although there are worries about Trump contesting election results and refusing to concede, I think there is a very low possibility, therefore we may not experience high volatility. Hence, I am not trading the VIX.
Market hates uncertainty and I think a Biden victory could get rid of all these uncertainties. I expect more money to be printed, as well as an increase in implementation of market-oriented policies, these could keep the markets bullish, at least for the first month after the elections.
