US election market update

The stalled US election results do not change the fundamentals of the global economy and their impact on markets. We are in the middle of a second (or third, depending on the country) wave of the COVID-19 virus which inevitably slows the recovery in world growth. Beyond the obvious lockdown victims (travel and leisure, hospitality, high-street retail), services are generally being curtailed, as people spend less on non-work and non-essential activities.

What this picture misses, though, is the strength of other parts of the economy:

• Manufacturing is on a tear, whether in China, the US, Germany or other industrial countries
• In addition, all the working from home, which many are now totally used to, will continue to carry various industrial and services sectors
• Finally, we have government support - it has been called fiscal stimulus but rightfully should be dubbed ‘income replacement’, as many individuals have been living off unemployment subsidies, furlough schemes and the famous PPP in the US (Paycheck Protection Program).

When you add together the three areas that are doing well, then the global economy does not look so depressed.

To recover further to the next level, we need more government intervention, in the form of fiscal spending. After central banks, it is now the turn of budget deficits to fire up the ailing economy.

Will the US election help or hinder the COVID-19 recovery?

Unfortunately, the US election slows down this process of economic recovery. Regardless of whether Trump or Biden is declared President, probably towards the end of this week, the Senate outcome is unlikely to deliver an overall US Congress which will spend in the size required. When it comes to spending, President Trump is more aligned with the Democrats than the Republicans. The numbers he was proposing were very close to the Democrats, around US$2trn, whereas his own party was reluctant to go much beyond US$500bn. The difference to the speed of recovery would be noticeable.

The tightness of the Senate races makes it unlikely that Democrats will be able to achieve a majority there, which is set to perpetuate the legislative ‘gridlock’ we have seen in the last couple of years. If both houses of Congress don’t agree, little gets spent, regardless of who is in the White House. The main distinction markets will make about Trump vs Biden with a split Congress is on trade. Trump is more likely to continue with tariffs whereas Biden should not, so market sentiment might improve somehow with a Biden presidency.

Healthcare developments – the ultimate antidote for the economy and markets?

There is another way, of course. Healthcare developments could be positive and enable us all to go back to ‘normal’. A vaccine will be required in huge numbers and the population should be willing to take it; therapies should become available to make the virus less lethal or debilitating; testing, tracking and tracing should become a fact of life - not to mention mask-wearing. This would allow governments to lift all their shutdowns and the economic recovery to broaden beyond manufacturing and working from home beneficiaries. Fiscal budgets cannot support us forever, so we will need self-sustaining growth.

Notwithstanding the US election, what is happening in the UK and the rest of the world?

Ultimately, the US will have a President and a Congress on 20 January. What is not clear is what they will enact in order to stimulate the economy. The rest of the world is not waiting, though. Stimulus is huge in the UK and Europe. China is now back to its pre-COVID-19 economic level. Healthcare progress is likely during the first quarter of 2021. The examples of countries (mostly islands) where the virus has been eliminated, show a large growth upside due to pent-up spending. This should underpin global growth without restoring previous levels of economic activity.

The UK is in a special place, as we get into the final furlong of the Brexit negotiations. Whereas we may have solved the fisheries problem, it seems unlikely we will end up with a comprehensive agreement for many sectors of the UK economy. A skinny deal may not boost growth sufficiently to help UK equities outperform the rest of the world. On the other hand, good UK companies have sorted out their individual Brexit solutions and this is where stock selection will make the difference, as we have said before.

Will anything change our investment priorities after the US election? Probably not. We still believe equities will do much better than government bonds. We still think technology, healthcare, environmental and social changes will lead markets. A potential move to more cyclical industrial sectors might still happen, but on a lesser scale. We still think Japan is the forgotten market and that gold can act as a non-correlated asset to provide some defensiveness to portfolios. The final US election result and Brexit outcome will help fill in the details but should not change the substance.

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