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US Election Update 2024 (Professional Advisers)
04.11.2024

US Election Update 2024 (Professional Advisers)

James Beck, Partner, Head of Investments

For UK citizens and taxpayers, focus has been firmly on the UK parliament and the Labour government’s first budget set to be delivered by Rachel Reeves on 30th October. However, of far more consequence for both markets and geopolitics is the US presidential election, just one week away. The campaign has been one of the most abrasive and polarising on record, with the outcome likely to hinge on the narrowest of voter margins in 7 key swing states. Whilst the election is on 5th November, the final result may not be known for several days – even if the vote is uncontested!

Both financial and betting markets are currently leaning towards a victory for Donald Trump alongside the Republicans gaining a clean sweep majority in both houses of Congress and with it control of the legislative agenda. However, polling is incredibly tight leaving all potential outcomes firmly on the table.

With the parties seemingly miles apart politically and on many social issues we consider what the result could mean for investors and how that could influence portfolio positioning.

What’s the policy pitch?

For investors the pitch has largely coalesced around four key topics: immigration, taxes, trade and regulation.

The driving force of the Trump campaign has been an agenda built on cutting taxes at home, increasing tariffs on imports, rolling back regulation (particularly around energy and environmental policies) and reversing immigration – including deporting up to 10 million people.

Harris’ policy agenda is less well defined, but likely will involve a continuation of much of the Biden administration‘s agenda. This will mean continuing government spending and investment in infrastructure and a balanced energy mix, tax increases, specifically on the highest earners (those above $400k), more regulatory intervention across industries and a more measured trade policy with China, the strategic focus of tariffs.

Implications at home

Whilst all eyes are on the main event, the outcome of the undercard elections for the Senate and House of Representatives are important in that they will define how much of the President’s domestic agenda can make it through the legislature.

A Republican clean sweep is being seen as positive for equity markets, at least initially. The Republicans support not only extending Trump’s 2017 tax cuts beyond 2025 but reducing corporate tax rates. Good news for corporate profit margins. They are also expected to reduce regulatory interference providing a further boon to corporate flexibility and dynamism.

By contrast the Democrats are seen as likely to favour higher corporate tax rates and greater regulatory interference, creating the potential for an initially negative reaction from equities in the months after the result and pressure on currently sky-high profit margins.

In retrospect US and global markets have reached new highs under succession of administrations including both the previous Trump and current Biden presidencies. The old maxim is that markets care more about profits than politics and so it has been the exceptional performance of the US economy that has underpinned new highs in equities. Albeit benefitting the fiscal support provided by both Republicans (in the form of lower taxes) and Democrats (through higher government spending).

Current momentum in the US economy remains strong. Inflation has receded sufficiently to embolden the Federal Reserve to begin cutting interest rates whilst Gross Domestic Product (GDP) looks likely to have expanded at a rate above 3%; comfortably above the trend of the last 15 years and three times faster than the rate in the UK. With US consumers continuing to benefit from low unemployment, high asset prices and growing wages, and both candidates committed to maintaining some form of Federal support to the economy, the US looks well placed to continue its expansion whoever wins.

If US growth looks solid for now, then focus shifts to what the potential policy impact may be for specific industries. Here, Trump’s comments on renewable energy and oil (“drill baby drill”) suggest a rolling back of support for renewable energy and technology, and an increasing support for oil companies and domestic auto manufacturers under threat from cheap Chinese electric vehicle exports – which may partially explain Elon Musk’s decision to join the MAGA cheerleaders in chief.

Harris, conversely, would continue to support the infrastructure and onshoring agenda of Biden’s Inflation Reduction and Infrastructure and Jobs Acts, with their emphasis on broad renewal and investment in energy transition. She has softened on big oil, but the longer-term focus would very much remain wind, solar and electrification.

Healthcare is also in the spotlight as an area of difference. Trump has previously expressed reservations about the Affordable Care Act and scope of Federal healthcare support through Medicare and Medicaid. Harris by contrast has focussed on drugs pricing and the ability of pharmaceutical companies to charge high prices for important medicines. The outcome of the election could have very different implications for companies within the same industry group.

Deregulation under the Republicans should prove a boost for banks and financial services. The Democratic agenda is predisposed to interventionism; they have mooted placing price controls not just on big pharma but also on food retailers who they accuse of gouging prices at consumers’ expense. This would limit companies to increase prices and with them, profits.

Finally, the Harris campaign has highlighted the importance of housing affordability as a cornerstone of the American dream. With houses less affordable than ever she has proposed incentives for construction that could see a pickup in the housing market and associated companies in renovation and renewal. This could be powerful if accompanied by falling interest rates.

Our focus on strong underlying business fundamentals and building resilient portfolios balanced across sectors and industries leaves us confident that we are well prepared to absorb the initial reaction to the election and allow time for a cool-headed assessment of what actual policy may mean for longer-term opportunities.

What about the rest of the world – return of the Tariff Man?

Amongst the most eye catching of Trump’s promises is a universal tariff on all imports of 10% to 20% and a blanket tariff on all Chinese imports of 60%.

Protectionist policies have been growing since Trump’s first stint in the White House and have spread beyond the US, most recently in the form of a tit-for-tat between the EU and China over cars and cognac.

The Biden administration has not objected to protectionism, retaining Trump’s tariffs and applying additional tariffs on Chinese autos and steel. However, the approach has been more measured and strategic.

Universal tariffs would not be a good thing for US consumers raising prices and could potentially resemble another price shock that brings with it the spectre of inflation. This could have worrying implications for consumer confidence, spending and interest rates. Trump has previously used the threat of tariffs as a negotiating technique to extract better terms of trade and benefits for the US. The hope is that he is using the same playbook this time.

Beyond tariffs, Trump’s foreign policy is more overtly “America First”, and the reversal of global co-operation would only continue. Not a positive development for global growth but likely worse for the rest of the world than the US.

Furthermore, an introspective and more outwardly aggressive US has been increasingly willing to weaponise the dollar as a foreign policy tool given its role as the world’s reserve currency. Most obviously by freezing Russian assets and access to the financial system following the invasion of Ukraine.

The major beneficiary of this has been gold with central banks in China and beyond looking to reduce their vulnerability to US financial sanctions by selling US Treasuries and buying gold. The return of Trump could easily raise the stakes and tension higher. Gold remains a core holding for us even after its strong recent run.

Trump & Harris seem to agree on at least one thing; the budget deficit isn’t an issue. We’re not so sure.

The US budget deficit in 2023 was 6.3% of GDP, or $1.7 trillion. Whilst the national debt is c$36 trillion, over 1.2x annual GDP and double the level in 2016.

Both Trump and Harris’ policies involve maintaining a high level of support from the Fiscal government to engender growth in the economy. Both are likely to further swell the debt in coming years. The independent Committee for a Responsible Federal Budget estimates that Harris’ policies would add $3.5 trillion to the US Federal deficit in the next 10 years whilst Trump could add $7.5 trillion.

Even before the impact of the candidates’ policies, US government spending is expected to reach $13 trillion by 2029; more than double the $6.1 trillion spent in 2023. Austerity is firmly out of fashion.

We have already seen in the UK under the Liz Truss government how markets can respond to the prospect of ballooning deficits.  With Donald Trump also suggesting that he could take a more active role in monetary policy, removing the independence of the Federal Reserve, this threat combined with potentially ballooning budget deficits could undermine investor confidence in the US bond market.

Bonds are supposed to be a defensive asset. The building risks in the US have tilted the balance of risk and return and already prompted us to rein back our exposure.

Conclusion

The outcome of the US election will absolutely have implications for investors both at a headline and at a sector level, just as it did in 2016 and 2020.

Quite what those implications will be, depends not only on who is in the Oval Office, but also who wins the house and, in a campaign of extreme and divisive rhetoric, whether the most extreme promises of either candidate find their way into law or simply prove to have represented clever electioneering.

Irrespective of the outcome next week, we continue to remind ourselves of the resilience and dynamism of the US economy both in absolute terms and relative to much of the rest of the economically mature world. It has consistently shown itself capable of progress almost irrespective of the political leadership. It would take a brave individual to bet against the US.

 

Written by James Beck, Partner, Head of Investments. 

This document is a client communication for UK regulatory purposes and is directed only at investors resident in the United Kingdom.

This document does not constitute investment advice or a recommendation.

The value of investments, and the income from them, may go down as well as up, so you could get back less than you invested.

This material has been issued and approved in the UK by James Hambro & Partners LLP, which is authorised and regulated by the Financial Conduct Authority and is a registered investment adviser of the Securities and Exchange Commission. It is listed in the Financial Services Register with reference number 513246. James Hambro & Partners LLP is a limited liability partnership registered in England & Wales with number OC350134 and registered office at 45 Pall Mall, London SW1Y 5JG. A list of members is available on request. The registered mark James Hambro ® is the property of Mr J D Hambro and is used under licence.