The US election is likely to go through a long, drawn-out endgame. But once all the votes are counted and the court battles fought, Joe Biden looks set to emerge the victor and President of the United States in the New Year. So when the dust finally settles, what will it mean for the US economy and for UK investors?
The policies of the outgoing and incoming President are miles apart. For example, Trump withdrew the US from the Paris climate agreement while Biden wants to spend $2trillion on moving towards net-zero emissions. Trump slashed taxes while Biden wants to raise taxes on the wealthiest Americans.
Yet despite their differences, the change in administration may not have a huge impact on the US economy. That is because, while Biden may have won the Presidency, the Senate looks likely to remain under Republican control. Since all policies will have to go through the Senate, Biden may be forced to water them down to get them passed.
No real change?: While Joe Biden may have won the Presidency, the Senate looks likely to remain under Republican control
John Redwood, chief global strategist for wealth manager Charles Stanley, says: ‘Assuming Joe Biden is confirmed as President elect and the Senate remains under Republican control, US economic policy will not change markedly. The Senate is likely to block large tax rises favoured by the Democrats and scale back extra borrowing and the larger deficit they might favour.’
But even with limited power, the new President will seek to drive through a fresh agenda, which could affect sectors including technology, healthcare and energy.
Tech firms may have their wings clipped
Joe Biden is concerned about the market dominance of big technology companies. He may not have the power to break them up, but he could still limit their influence.
Susannah Streeter, senior investment and markets analyst at wealth manager Hargreaves Lansdown, says: ‘Biden has singled out Amazon for criticism, accusing it of not paying enough tax. So the prospect of tougher regulation might see its share price come under pressure.
‘Also, by snapping up Instagram and WhatsApp, Facebook has been accused of stifling competition and there is a chance it could be forced to hive off parts of its social network under anti-trust laws.’
Technology has been the big success story for investors in recent months. Tech stocks have made up most of the growth not just in US markets but globally this year. Apple alone is now worth some $2trillion (£1.5trillion). Should Biden curb the growth of US technology companies, it would impact not only portfolios invested in tech stocks, but also those with a US or global remit.
Tech could benefit from Biden’s attitude towards China. While his approach may be less aggressive than Trump’s, Biden is likely to encourage companies to continue moving supply chains away from China and closer to home. Rachel Winter, associate investment director at stockbroker Killik & Co, explains: ‘This will result in a higher wage burden, which companies will offset by investing in more automation. Cloud computing providers such as Microsoft could benefit, as well as companies involved in factory automation such as Keyence.’
Blow to energy but healthcare prospers
The energy sector is likely to see huge transformation as the US moves from fossil fuel supporting Trump to renewables champion Biden. Killik’s Winter says: ‘Biden is supportive of the transition to renewable power.
‘A Democrat victory would deal a blow to US oil giants such as Exxon Mobil and Chevron, while creating further opportunities for renewable infrastructure companies such as NextEra.’
Biden has pledged to make healthcare more affordable. Should he carry out his plan to cap prescription drug prices, the pharmaceutical sector could come under pressure. But it will likely profit in other ways.
Hargreaves Lansdown’s Streeter explains: ‘The wider healthcare sector should benefit from reviving parts of the Affordable Care Act, which was cancelled under the Trump administration. Biden has also pledged to invest billions more dollars in care for children, the elderly, veterans and opioid addicts which could boost providers of health care training.’
Tax rises…but the US economy may benefit
Biden may raise taxes for corporations and very wealthy individuals. This would weigh on the profits of large companies, but his powers to raise taxes will be considerably curbed by the Senate.
Winter says Biden may want to reverse some of Trump’s large tax cuts, but believes his actions could well end up reinvigorating the economy. She says: ‘Much of the money raised from his proposed higher taxes would fund his proposed economic stimulus package.
‘Biden has suggested a far higher level of economic stimulus than Trump and this would likely reduce much of the negative impact on the market of tax hikes.’
So what should UK investors do?
US markets could be set for significant volatility until the matter of the Presidency is settled. But this should not unsettle long-term investors.
Adrian Lowcock, head of personal investing at fund scrutineer Willis Owen, says: ‘Investors need to look through the short-term noise and focus on what investing in the US longer term means.
‘The US market is still the world’s largest equity market and therefore investors should have some exposure directly to it.
He adds that while technology has been the large driver of stock market growth in recent years, investors should look to diversify into other areas. Lowcock likes investment funds JPM US Equity Income and T Rowe Price US Large Cap Growth.
Darius McDermott, of Chelsea Financial Services, agrees that the US is still a good place to invest. ‘Despite the ugly politics, it is an area of growth,’ he says. ‘There is likely to be short-term volatility in the stock market, but there are plenty of investment opportunities out there.’
Exposure to the US market can also be obtained through a global investment fund. That is because many of the world’s biggest companies are based in the US and so feature in the portfolios of most global funds. For those preferring a global approach, McDermott fancies Fidelity Global Special Situations, which has about 50 per cent of its portfolio in the US.
Also, Lazard Global Equity Franchise which has around 60 per cent in the US. While the Fidelity fund invests in big tech stocks, the Lazard fund avoids them.
Emma Wall, head of investment analysis at Hargreaves Lansdown, cautions that investors buying a US fund could be doing so at a time when the market looks over-valued. She adds: ‘The US market is up around 10 per cent since the start of the year despite coronavirus concerns, and certain sectors are looking stretched.
‘That is not to say you shouldn’t own any US stocks. The US represents a large part of the global market, and a well-diversified portfolio should include an allocation to America, but start small and think long term.
‘A fund such as Legal & General US Index is a good option because it tracks the performance of the FTSE USA Index. This could be complemented by a fund investing in smaller businesses such as Artemis US Smaller Companies.’