A Biden dividend?


As global celebrations get underway, and people thank God for their deliverance from the chaos & divisiveness of Donald Trump, global markets are joining the party. Will it last? It is a multi-faceted partly political question.

Let us dispense with Trump’s legal posturing over recounts. Firstly, the Bush/ Gore 2000 Florida recount over 537 votes is not analogous and was between two candidates. But 2020 is constitutionally entirely different. Can a sitting President blatantly attempt to overturn an election, without a total collapse of Congressional support, being forced to resign, or face Amendment 25 or impeachment? Even if these legal challenges are remotely possible, Trump’s suits will fail due to lack of either evidence or procedural impropriety.

Trump’s casting doubt on an election result that runs to a 4 million vote differential in Joe Biden’s favour, and thousands of votes in six swing states is patently absurd but might be motivated by a need to strike some sort of exculpatory deal. I hope as the shock is absorbed and reality sinks in, Trump sees reason and backs down. He could still salvage the transition period with a dignified exit. Inauguration is not until 20th January 2021. But a moot point is how President Trump is ‘managed’ over the 10 weeks transition period. The Vice President, some family members, WH staff, senior Republicans appear to be running for cover. This is a risk factor for markets.

2021 will see possible US Senate gridlock (46 Democrats, 2 independents, 48 Republicans is the current tally). The Democrats need control of the Senate which can only be achieved with continued independents support and via winning 2 run-off votes in Georgia (during January). Assuming those go their way the Senate will see both parties would hold 50 seats allowing the Democrats control via the Vice President’s casting vote. But if Georgia votes Republican senators there will be gridlock.

Also important is Biden’s willingness to find common ground and the Republican party moderating towards new leadership. The Republican party leadership will pass to its senior Senators who will have their hands full managing the Trump fallout.

There are a few possible outcomes for the stimulus plan:-

a)        Gridlock occurs but President Biden and the Republican leadership find common ground for another stimulus plan

b)        Gridlock does not occur and Senate Democrat control ensures another stimulus plan

c)        Gridlock prevents another US stimulus plan (unlikely in our view)

d)        A C-19 vaccine/ treatment emerges, GDP expectations rise which makes further stimulus unnecessary

e)        President Biden carves out a new path away from more immediate spending?

Away from the stimulus plan, we are positive on the oxygen that Biden provides.

Biden multilateralism is good for EM

Biden is schooled in American diplomacy, respect for global institutions, managing the US clientele and keeping in the right company. American enthusiasm for multilateralism and globalization will thankfully resume. I expect overtures to the likes of Kim Jung Un, Rodrigo Duterte, General el-Sissi, Jair Bolsonaro will change radically.

Generally Biden is likely to re-prioritise trade and foreign affairs, de-escalating tensions with key players. We do not expect Biden to threaten trade wars, sanctions, tariffs and the consequent tensions will not be missed. Biden is likely to re-prioritise US international relations differentiating between economic and trade objectives with allies and non-allies. What we do not know is the extent to which trade / international relations figure in the new President’s priorities.

The UK needs a US/ UK trade deal but if the new Administration does not command a Senate majority it may be harder for Biden to achieve Congressional support. A US/UK trade deal might not be top of Biden’s agenda anyway.

However low Fed rates, and a de-escalation of Sino-US trade tensions generally is GDP positive for China and emerging markets. Emerging markets would also benefit from a weaker US dollar.



US recovery in 2021 hinges on a credible Budget

In early trading on the 4th November 2020, investors thought Trump would win again. They had not factored the miracle of Biden’s s mail-in ballots delivering Michigan, Nevada, Pennsylvania and Georgia. The market responded by selling US Treasuries on the view that Trump would increase the US budget deficit further. However Treasuries have since rallied reinforcing the view that Biden’s inherent stability amounts to a better bet for US bonds.

US T-Bond 10 year yield

source: www.marketwatch.com/investing/bond/tmubmusd10y?countrycode=bx


Biden should be better for US Treasuries?

a)        Firstly more stability for the US Fed whose independence faced Trumpian  threats. The main beneficiary is Federal Reserve chair Jerome Powell. His leadership was put under relentless pressure by Donald Trump, who regretted appointing him and frequently berated his decisions. Powell is likely to play a far more advisory role to Biden. The Fed’s monetary stance, near zero Fed funds (0%-0.25%; 15th March 2020) is likely to remain in place for the next 12-24 months.

b)        On the US Budget deficit the trajectory since the Trump enacted Tax Cuts and Jobs Act 2017 has been dire. The revenue side has been the decline in corporate taxes to just $212bn from over $300bn in 2017 contributing just 6% of government incomes.

US Budget 2017 2018 2019 2020
Revenue ($trn) $3.32 $3.33 $3.46 $3.42
Expenditure ($trn) $3.98 $4.11 $4.45 $6.55
Budget Deficit ($bn) $666 $779 $984 $3,130
Budget Deficit (% of GDP) -3.5 -3.8 -4.6 -15.2

While 22m jobs were lost over March and April 2020, about half of these have been re-employed. In terms of Federal government spending, C-19 has caused a $1.8trn increase above the original $4.79bn budgeted due to the CARES Act and three other stimulus measures. Can the US afford another stimulus plan?

Key challenges for Biden include:-

i)          increasing corporate taxes whilst keeping investors onside; reversing key elements of the Tax Cuts & Jobs Act insofar as corporate taxes are concerned

ii)   encouraging US employers to re-hire which can only be done by maintaining the US economy’s momentum

iii)    returning the US budget deficit to a more normal 3%-4% GDP deficit.

However what investors are still in the dark about is the President-Elect’s plan for reducing the ballooning US budget deficit. Because current deficit levels are clearly unsustainable.

C-19 rages on but there is now light in the tunnel

In his acceptance speech Biden pledged “to get C-19 under control”. Recent data, 5 days of a daily death count above 1,000 and a record 126k new daily infections.

Biden could be lucky if a Pfizer treatment is available over Q1 2021, it would avoid a lockdown and mitigate other difficult C-19 restrictions. It is likely in any event the new Administration will mandate more mask wearing and distancing measures in the short term.

Investors should enjoy the stress lift

The short-term plan for Biden is likely to involve reversing Trump’s most damaging measures.

*Rejoining the Paris climate accord that aims to reduce climate change via reducing the burning of fossil fuels

*Reverse the US exit from the World Health Organisation

*Lifting the US ban on travel from a number of predominately Muslim countries

*Reinstate DACA – a programme that deferred the threat of deportation for undocumented migrants who entered the US as children.

Joe Biden is arriving at a time of immense stress, not just in terms of government finances, C-19, the state of the union, US unemployment and is facing the disconnect of very high valuations. An adjustment will take place as investors realize that US corporates will have to pay more tax which other things being equal, means lower earnings. For the moment though investors can de-stress there is genuine relief that the world does not face another 4 years of Donald Trump.

Whilst cognizant of the sheer scale of the challenges faced by Joe Biden, we are mindful of his experience, and skill in handling Washington’s challenges. It is said ‘fortune favours the brave’ and we wish him well.

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