11 November 2020
With Joe Biden finally confirmed as the 46th US president (Trump legal challenges notwithstanding), GAM Investments fund managers consider the possible implications for their respective asset class.
Christophe Eggmann, Investment Director and Dr Jenna Denyes, Senior Healthcare Analyst, Healthcare Equities
It looks like the dust is finally settling in the American election, but some things were already clear, and our prediction of a split congress is one which seems to have played out. The number of seats for each party could still shift slightly to one side or the other, but the much discussed ‘blue wave’ did not materialise. This blue wave would have been negative for the healthcare sector, with many assuming the focus would shift to drug pricing. Notably though, a completely Republican government also had its own risks to the healthcare sector as the Supreme Court debates different sections of the Affordable Care Act (ACA). Ultimately, a split government is the best possible outcome for the sector, and given our overweight in biotech and pharma, we do anticipate this will be positive for both our holdings and the sectors as a whole. No large, sweeping changes are now expected in the near future, which should calm investor fears for the sector. In light of the above, we do not see the final outcome of the presidential election outweighing this positive result for the sector.
Amanda Lyons, Investment Manager, Technology Equities
We now know that Biden has effectively won the US presidential election. One thing that has come out of the election that does impact tech is the vote that took place in California. In addition to the presidency the state voted on Prop-22. California has brought in a law called AB5 which meant contractors would have to be classed as employees and would then receive full employment benefits and a minimum wage. Prop-22 would allow gig economy workers to remain as independent contractors, however it does offer some concessions of additional benefits (but these will only be linked to active time on jobs, not wait time). At the time of writing, Californians have voted 58% in favour of Prop-22 with 80% of the vote counted.
This is important for companies such as Uber and Lyft, as well as food delivery companies such as Grubhub or DoorDash (private). Uber and Lyft had contributed approximately USD 100 million to the campaign to get Prop-22 passed. The implications for it not passing would have been a significant increase in costs and questions over the validity of their business models. More importantly, had Prop-22 not passed, it was expected similar legislation would follow in other states, which is now looking much less likely.
Regulation in the tech sector is unlikely to be a top priority for Biden post election – health and the economy will take priority. Both Trump and Biden had made it clear they want to repeal Section 230 of the Communications Decency Act, which was enacted in 1996 to make the internet more commercial. Their opposition to the act, though, is coming from polar opposite angles. Trump was concerned conservative voices are stifled, while Biden is more worried about harmful content which could be interpreted as too much noise from the right.
Biden has to date said little on big tech and has no clear tech policy advisors; he has said in interviews he is more interested in content moderation than competition policy. However House Democrats have put forward a report advocating major changes to anti-trust laws aiming at limiting the ability to acquire smaller competitors and restrictions on selling their own goods in their own marketplaces, which would impact Amazon in particular. Anti-trust laws would be expanded to cover ‘harm to workers and innovation’ rather than just harm to the consumer. This is a big deal, as the main line of defence for companies is that the consumer is getting their products for free, therefore where is the harm? The report also proposes increased funding to the Federal Trade Commission, which is currently held back by budget constraints. If Biden were to support this report it could be a big negative for tech; anti trust can take years to go through the courts and would likely end up in the Supreme Court.
Asian and Chinese equities
Jian Shi Cortesi, Asia/China Growth Equities
We see Biden’s victory as generally positive for Asian equities. Biden will likely adopt less aggressive trade policies compared to Trump, which would benefit Asian exports, particularly the export markets such as Korea, China and Singapore.
A Biden presidency is also positive for Chinese equities. Trump’s trade war and his aggressive stance on China and Chinese technology firms have been a major trigger for a number of corrections for Chinese equities in the past two years. While we expect the rivalry between the US and China to continue, Biden is likely to adopt a gradual and less disruptive approach to sever economic, trade and financial links with China. In the short term, Biden will also be occupied with domestic affairs; Covid, economic repairs and mending relationships with America’s allies which have been alienated by Trump. Therefore we may not see major moves from the Biden government on China in the short term. This means we could have a period of relative stability for the US-China relationship, which would be positive for China market sentiment.
A major risk factor is Biden’s tax policy, which may lead to higher corporate taxes and lower earnings for American companies. The US stock market tends to set the tone for global markets. If we see a US market sell off due to concerns over higher corporate taxes, it may trigger a global market sell off, and the Asian equity market would be negatively impacted in this scenario.
Tom Mansley, Investment Director, Asset Backed Fixed Income
The largest factor affecting fiscal policy after the election is the fact the Republican party maintained control of the Senate, stopping the ‘blue wave’ that was forecast by many polls. Going forward this will mean that we should have a more rational government as the parties must negotiate new legislation together. The main implications are that the Covid relief bill will be smaller in size, and inflation expectations and bond yields should remain relatively stable.
The shift to a Democratic party in the White House should be positive for housing, as many of its policies, such as low income tax credits for renting, first time home buyer tax credits and a desire to repeal the non-deductibility of state and local taxes would all benefit the housing market. While not all of these policies will necessarily get through the Senate, the idea is that the balance of power has shifted toward a party that would be helpful for housing. Additionally, a Republican controlled Senate also means that large tax hikes are off the table, which will be beneficial for homeowners.
It is important to note that these factors will not necessarily help commercial mortgages that are secured by collateral such as office buildings and large retail shopping malls, as the Democratic party has no agenda to save those institutional equity interests. Agency MBS could also do well as the Biden administration will not pursue the privatisation of Fannie Mae and Freddie Mac with the same motivation as the Trump administration.
Mortgage rates last week fell to a record low of 2.78% since Freddie Mac started collecting the data back in 1971. This has the dual effects of sustaining the currently strong demand for housing by keeping it affordable for new buyers and allowing current owners to reduce their interest payment by refinancing. With a divided Congress and less pressure on rates to increase, this should keep the homes affordable for some time, helping to sustain the currently strong demand for housing and the solid creditworthiness driven by the smaller required mortgage payments by existing owners. Prior to the lockdowns imposed as a result of Covid-19, the US unemployment rate was at a record low of 3.5% and the housing market was as strong as it has ever been. The large rise in unemployment rate cast a cloud of uncertainty over the future of the US housing market; it peaked in April at over 14%. That rate has already declined to under 7%, and the newly elected government will look to extend unemployment benefits which should keep delinquencies low.
Meanwhile, we are back to a record low of existing homes available for sale. Mortgage lenders are having difficulty keeping up with the volume of both purchase mortgages and refinances and are keeping underwriting standards tight as a result. It is important to note that the recent increases in house prices are not being facilitated by loosening credit standards. On the contrary, the average FICO score of new mortgages originated for purchases has increased this year. Housing inventory for sale is at an all-time low, demand is strong and housing is still very affordable by historical standards; the newly elected government should be a net positive for the housing market and consumer credit. The Case-Shiller National home price index was up 5.7% over the last year, and we expect it to continue to perform well.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice.