Macro: Sandcastle economics
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Update to our US election baskets
Peter Garnry
Chief Investment Strategist
Summary: The market was yesterday most likely creating a new narrative on a Biden victory which is that of potential clean sweep by the Democrats which could pave the way for the recently House approved $2.2trn stimulus bill. However, we are still not buying the net positive narrative as Biden will most likely hike corporate taxes creating a significant headwind for US earnings and thus we are still leaning towards a Trump victory being more positive for equities. We have updated our election baskets so that a Trump victory is now positive for health care stocks. The updated baskets do also include single stocks.
On Friday we put out our first take on US election baskets as a response to the first US presidential debate. But going back to 20 August we did an extensive list of green energy stocks that could gain on a Biden election win as his Clean Energy Revolution would increase spending and enact policies in favour of green energy stocks.
Our initial take ahead of the US election on 3 November was that Biden would be perceived as net negative for equities due to uncertainty over taxes and in particularly corporate taxes. According to Biden’s campaign details his proposed corporate tax hikes including hiking the GILTI (global intangible low-taxed income) tax rate which would apply mostly to technology and health care companies would be negative for the technology, communications services and health care sectors. This is also long-term the direction under a Biden administration and could create up to 10% headwind for S&P 500 earnings. More details can be found in the soon to be released Q4 Outlook. You can sign up here for Q4 2020 Quarterly Outlook live presentation on Friday.
What we saw yesterday in equity markets was mostly likely a reflation trade (long growth stocks and small caps) but also the market most likely pricing out the scenario for a contested election given Biden is gaining in the polls. Given this lean in polls the market may also be discounting a higher probability for a clean sweep by the Democrats (getting the majority in US Congress), which will make it more likely that the Democrats’ $2.2trn stimulus bill passed in the House (controlled by the Democrats) four days ago could go all the way after the election on a clean sweep victory. That would increase fiscal stimulus at a much-needed time as the US economy still lacks 4% more growth to be back at positive y/y growth. So, the market seems to be switching to a positive Biden win narrative for equities. We are not fully convinced and is thus not updating our election baskets on that account.
However, compared to the US election baskets presented on Friday we have changed two things. We have switched the positive oil & gas theme under a Trump victory to oil & gas exploration as this is a higher beta play on less strict environmental laws under Trump. We have also switched the health care theme under Trump victory from negative to a positive view given the Regeneron Pharmaceuticals story related to its antibody treatment of Trump and potential emergency approval by the FDA. You can read more about this story in our Quick Take and podcast from today. It seems more and more likely that the health care sector will have less FDA regulation under a Trump administration and from a shareholder perspective this could be interpreted positively if Trump wins.
The table is the same US election basket from Friday’s analysis but now updated with single stocks. We have put in the five largest stocks in each category selecting them from key benchmark indices. They are therefore not our direct single stock recommendations but inspiration for which single stocks are attached to each theme under a Biden or Trump victory.
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