American dream or nightmare?: An investor’s field guide for next week’s US election

Even if a clear result for either candidate is achieved in good time, local fund managers say investors will still need to navigate the longer-term consequences of the two candidates’ differing tax agendas, energy policies, and diplomatic styles.

“I think the key difference between Trump and Biden is that the latter wants to provide more support … and if he can get a Democrat clean sweep, that rules out Congress being a permanent inhibitor to a legislative agenda,” says Perpetual’s head of multi-asset investment strategy Matt Sherwood.

“As such, traditional value and cyclical sectors like financials, industrials and REITs could do well under a Biden administration whereas with Trump still president, given his ability to get the economy moving again and create lower unemployment, that that might provide more support to consumer stocks.”

US-facing earners

The ASX takes its lead from the US markets most trading sessions, and many of Australia’s biggest companies generate significant earnings from the world’s largest economy.

Firms on the ASX with heavy exposure to the US could therefore be major beneficiaries from the significant infrastructure and housing commitments of each candidate and particularly if Biden wins, a heftier stimulus deal to repair the US economy.

“If Biden wins and gets through a large fiscal program… that obviously would help the US economy to close its output gap,” says Sherwood. “And so firms within the United States get some sort of macro tailwind, which can contribute to their earnings and assist with re-hiring”.

Both Burman’s Julia Lee and Tribeca Alpha Plus fund portfolio manager Jun Bei Liu say Australian companies with a strong presence in the building materials and infrastructure sectors are in a particularly strong position.

Both name the likes of Boral, BlueScope Steel, Lendlease and James Hardie as potential winners regardless of the result, while MST Marquee investment strategist Hasan Tevfik says Sims Metals may also benefit if scrap prices rise.

“Essentially companies in Australia exposed to the building industry in the US could do well,” Tevfik says.

Lee says a number of ASX healthcarge firms with significant exposure to the US could also enjoy a bump, including blood giant CSL, ResMed, Cochlear and Mayne Pharma.

“And then the general consumer spending environment stocks like Brambles and Amcor are obviously active in terms of the US as well,” Lee says.

“Remember, both parties are looking at a quite big spending infrastructure. So that would be a positive for our commodity-based stocks.”

Macquarie analysts have, however, warned that any Biden tax hike could also hit US-focused earners.

In a note this week, the firm says a rise in corporate tax rates from 21 per cent to 28 per cent by 2022-23 could reduce ASX Industrials earnings per share by 1.3 per cent.

Based on US sales and earnings exposure, Macquarie estimates the FY23 EPS headwind could be (about) 5 per cent or more for the likes of Appen, Janus Henderson, James Hardie, Incitec Pivot, Aristocrat Leisure, Sims, Breville, Cochlear, News Corp and Computershare.

“Higher fiscal spending could be an offset for cyclicals, but less so for defensives,” Macquarie says.

Green energy lithium play?

To the chagrin of major fossil fuel players, a key plank of Biden’s election pitch has been a mooted $US1.7 trillion spend on research and development for clean energy – as well as tax credits to speed the spread of renewable power and electric vehicles.

The Democratic candidate has also expressed a desire to make America carbon neutral by 2050 – though he says there will still be room for some traditional oil and gas sources.

EY partner Duncan Hogg says major oil, gas and coal firms that are already beaten down by a virus-driven price slump in 2020 would understandably prefer a Trump win.

“But I think Biden will… (still) be very focused on trying to support them as energy providers,” he says. “Because they are quite important to the US economy.”

There are few obvious options on the ASX to invest directly in companies that might directly benefit from a green energy push.

However, Burman’s Lee says the potential need for battery materials – in particular lithium – may serve a number of Australian miners well.

“We’re the best diggers of dirt in the world and I’m looking at things like lithium, graphite, nickel ore which is used in newer technology and renewable energy solutions as well,” Lee says.

Local investment options in this space include Galaxy Resources, Pilbara Minerals, Orocobre, and Mineral Resources.

Sherwood, however, says any green energy push could prove a more long-term prospect.

“Green sounds good as it reduces fossil fuel consumption and emissions at the margin, but it can’t be a substitute for bulk energy,” he says.

“At the moment, green energy is good for households with solar panels, but in the end it can’t deliver production for an entire suburb, let alone an economy.”

Tech shake-up

US tech stocks have been both a major winner of the pandemic-driven work-from-home revolution and a key driver of the US equity market recovery since March.

The Nasdaq index hit record highs either side of the coronavirus rout as technology giants Facebook, Apple, Amazon, Alphabet (which owns Google) and Netflix marched onwards to dizzying valuations.

The success – and dominance – of these firms has however raised questions about their power, influence and impact on competition.

Both Trump and Biden have spoken on the issue though take different approaches.

Sherwood does not see local tech contingent suffering any flow-through from regulatory changes in the US just yet.

“I don’t think there’s really much difference between the major political parties in Australia and how they want to deal with tech firms as both see tech firms as a source of revenue as they pay very little tax in this country despite their growing market footprint,” he says.

“The key risk to tech (here) is the taxation treatment. If there is an economic downturn, which sparks a larger deficit, the answer could be to examine how to make global tech firms who can move profits around the world, pay more tax. But no one’s making noise about that at the moment.”

The China question

For all the election’s variables, one thing analysts and fund managers agree on is that Biden will most likely take a more statesmanlike approach to geopolitics.

And EY’s Hogg says this, in turn, could help a number of local exporters who have been caught up in the tit-for-tat US-China trade war.

He nominates Australian iron ore giants and coal producers as beneficiaries of a more serene relationship between the global economic giants, as well as the likes of Treasury Wines, who were hit when the Chinese launched an anti-dumping probe into wine imports from Australia in August.

Sherwood says whether geopolitics becomes more or less stable under a Biden presidency is unknown.

He says while Biden has a more conciliatory nature and likes the idea of building alliances, the key benefit of Trump is that he is completely unpredictable and negates any Chinese power play.

Regardless of the result, Liu says the stimulatory policies of each candidate mean Australian markets should enjoy an early Christmas rally. “I absolutely believe that this election is a win-win for our markets because, looking at the policies they’re both expansionary,” she says.

“This election is really a clear runway for equity markets.”