With global financial markets typically quietest during the month of August following the completion of Q2 earnings season for most large corporates, we wanted to spend some time thinking ahead.
This week in particular, given his currently commanding lead in the polls, we wanted to take a look at what a Joe Biden presidency might mean for global stock markets.
What’s the latest?
Joe Biden announced his running mate for the upcoming US election on Wednesday. In Kamala Harris, he’s gone for an establishment democrat with previous experience as a prosecutor, signalling a desire to play it safe in what will be an election to not only decide the long term fate of the US, but also one which could have long term ramifications for the existing global order.
The noises coming out of Wall Street, Silicon Valley & Hollywood following the announcement were broadly positive, with investors particularly relieved that Biden went for a moderate liberal in Harris. It's now incumbent upon them to convince the rest of America that a Biden presidency is a no-brainer versus a Trump second term - especially voters in the rural rust belt, the south and the swing states.
Why does a moderate liberal matter?
The US constitution is set up for incremental - not sweeping - change. This is because it’s relatively easy for policies which are too extreme to be held up in Congress. This means - especially when it comes to the Democrats being in charge - financial markets tend to prefer incremental change which actually gets implemented over sweeping change which may be held up or shot down when the laws make their way through Congress. Especially if the House and Senate aren’t both run by the same party.
Had Biden selected a more progressive running mate - such as Elizabeth Warren - financial markets may have had a larger cause for concern given the aggressive stance she maintained towards taxation and economic reform during her push for the Democratic nomination earlier this year.
So what might a Joe Biden presidency mean for global stock markets?
Asia
TL;DR: Positive for Asian stocks in the short term but more uncertain in the medium / long run.
It’s likely a Biden administration would spend a lot of the first year focusing on domestic matters and rebuilding the US economy following the pandemic. This means any further confrontation with China on its unfair trade practices will likely be more limited than it would under Donald Trump, at least in the first year.
We’d therefore expect to see the Chinese economy - and stock market - to strengthen, and along with it potentially other Asian economies which benefit from Chinese export strength during the early part of a Biden presidency.
This could change later on in the presidency however, as China is one of the few issues the US Congress has bipartisan agreement on. Specifically, they are unified in opposition to the Chinese Communist Party’s longstanding support of unfair trade practices as well as the influence it can exert on Chinese companies with access to a lot of data (Huawei & TikTok are the most recent examples of this).
While it seems unlikely a Biden administration would be as confrontational as a Trump administration, there will be a strong desire to address these issues one way or another. We think a more internationally cooperative Biden administration would likely engage its allies to team up in applying diplomatic pressure on China as the primary course of action.
Europe
TL;DR: Positive for European stocks
A Biden administration is likely to take a more internationalist approach, in stark contrast to the trade conflicts being stoked by the Trump administration. This makes any potential full-scale trade war with the EU highly unlikely.
This would be a net positive for European companies, whose earnings are highly exposed to both the Chinese and US economies following decades of globalisation.
We’d therefore expect European stock markets - especially those dominated by global companies such as the DAX, CAC and Euronext Amsterdam - to rally under a Biden presidency.
US
TL;DR: Headwinds for US stocks in the short term, with downside risk fading over the latter half of the presidency.
Biden is likely to be more aggressive towards tackling COVID-19, which could lead to more social distancing, more quarantining and ultimately further pain for the US economy in the short term. If executed correctly, however, this strategy could lead to a stronger bounce-back over the medium to long term - this is a large part the “Build Back Better” slogan being used in his campaign.
Elsewhere, Biden has proposed:
$2 trillion of spending to de-carbonise the US economy
$775 billion of spending to cover care for small children, seniors and the disabled
A raft of new initiatives to improve racial equity, provide jobs for working families and support small businesses, among other things
All of the above will clearly cost money, with most of it being paid for by reversing the Trump administration’s corporate tax cuts as well as raising taxes for higher earners and the wealthy.
This abrupt change in direction for the metaphorical American ship is likely to bring with it some volatility in the US stock market, but it remains to be seen exactly how much given the Federal Reserve has no plans on taking its foot off the gas with respect to the quantitative easing measures being carried out.
It could be reasonable to expect the US stock market to go sideways for a while or even slightly lower in the event of a Biden victory before heading higher again thanks to the economic growth which could be bought about by initiatives such as investments in green infrastructure, help for small businesses and/or a reduction of the student debt burden.
But what if Donald Trump wins?
This is still a real possibility despite what the polls might say right now, and we’ve seen the Donald pull off a comeback having been a similarly long way off according to pollsters in 2016.
Trump’s 2020 campaign policies will no doubt be made clearer in the coming weeks and months, somewhere between all the personal attacks he’s usually busy dishing out towards Biden and now Harris. We wouldn’t be surprised to see a string of populist announcements being made in an attempt to win more voters over the next few months.
Regardless, we think it’ll be broadly more of the same under a second Trump term, especially where the US economy is concerned given his obsessive focus on the stock market over the past 4 years.
For the US
TL;DR: Positive for US stocks overall for another 4 years, but potentially a lot of pain after the second term has ended.
In 2016, Donald Trump had a lot more money to play with thanks in large part to the Obama administration’s fiscal prudence over the previous 8 years. This meant Donald Trump could announce huge corporate tax cuts and $1 trillion of infrastructure spending back in 2017. Clearly, after trillions of dollars of fiscal spending to keep the economy afloat during the pandemic, there won’t be much as money freely available to spend in 2020. This could make it difficult to support an economic recovery without adding to the country’s debt burden, especially if money is spent pursuing short-term policies without investing in long term economic growth, as seems to be the case for this administration.
Elsewhere, you could expect to see further tax cuts to help the economy in the short term, but if they aren’t reinvested - as was the case with corporate tax cuts in 2017 & 2018 - long term economic growth is likely to suffer. Furthermore, having cut taxes already across the board for corporates and the wealthy, there’s less room to maneuver on this front now.
With respect to social issues, we think it makes sense to expect more divisive behaviour. This could include further roll-backs of environmental regulations, more help for the coal, oil & gas industries, a further degradation of race relations across the US and continued hostility towards immigrants on the Mexican border.
For the world
TL;DR: Downside risk for European and Asian stocks if counterproductive measures from the US aren't offset by regional economic and earnings growth.
With respect to his stance internationally more-of-the-same means you could expect to see the already fragile pandemic-hit global economy further slowed down by more tariffs as part of an increasingly intensifying set of confrontations with China, as well as a potential trade war with the EU. These increasing trade frictions could threaten to undo some of the economic growth brought about by globalisation over the past few decades. Tariffs in particular have the potential to hold European and Asian stock markets back significantly under a second Trump term.
You might also expect to see further dismantling of global institutions such as the WTO & UN and more bilateral trade agreements being struck - not only by the US but also between other major economies (thanks to Brexit, the UK would ironically have a head start on bilateral trade agreements if that theme becomes a trend).
Away from the EU & China, and on a slightly brighter note, Donald Trump seems to enjoy working with other autocratic leaders internationally, which could bode well for countries such as the Australia, Brazil, India, Saudi Arabia, the UK and potentially also improve relations with North Korea.
Earnings Season
As we've mentioned, most large corporates are done with Q2 earnings season - but there are still some interesting names left. Here's our usual pick of those names for you:
17 Aug: Geely
18 Aug: BHP Biliton, Home Depot, Persimmon, Walmart
19 Aug: AP Moeller-Maersk, Fortum, Lowe's, NVIDIA, Xiaomi, Severstal
20 Aug: Adyen, Afterpay Touch, AIA Group, Antofagasta, Australian Stock Exchange, CRH, Dollar Tree, Estee Lauder, Gazprom, Sberbank, VMware
21 Aug: Kingspan Group, Meituan Dianping, Vodafone Hutchison Australia
Until next time ✌️
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