2020 saw the democrats win the US presidency in a blue wave, taking both the house and the senate. Winning both means that policies will be easier for Biden to implement, but the traditional check and balances will still be followed.
Markets have already reacted heavily in the run-up to the election, but will we see more turmoil in 2021? Adrian Lowcock, head of personal investing at investment platform Willis Owen, says there are key themes that investors should watch as Biden becomes president.
“The Democrats have promised to invest heavily in the US to improve its crumbling infrastructure, with the President elect pledging to oversee $2trn of spending on clean energy and infrastructure. This will be spread over the entirety of his first term in office. Infrastructure investment has historically been used to boost economic activity as the money enters the real economy and not just financial markets. This should help drive industrials and support domestically focused companies.”
“Biden had promised to raise taxes at the start of his presidency, however, with the pandemic still weighing on economic activity, it seems unlikely he will do so while trying to stimulate the economy. In addition, although the Democrats have the senate, it is very narrow and Biden will find it hard to pass through tax rises. We expect this policy to be placed on hold, but if this happens it will surprise markets and tax rises have a direct impact on corporate earnings and therefore investments.”
Tougher on tech
“Biden has been critical in the past to the power and influence these groups have. Tougher regulation to control them seems likely, although this is a complex area and technology companies will lobby hard to avoid the worst of any regulation. Technology companies also have deep pockets and are extremely profitable. Regulation is unlikely to change this materially but the threat of it could impact valuations in the short-term. Longer-term it raises the barriers to entry so could benefit the technology giants.”
Better relations with China
“The fundamental issues between the US and China will not change under Biden, but we can expect a much better relationship. The combative approach is likely to be replaced by more traditional diplomatic methods. The use of tariffs, which are effectively a tax on the American consumer, should drop off which will benefit the economy and investors.”
Stimulus to boost Small and Mid-Caps
“The Democratic victory and plans for fiscal stimulus have already begun to be factored into markets, with small-caps delivering some strong performance since the election in November. We expect there to be more to come now they have both houses. Another round of stimulus could be in the region of $500bn to $1trn which is roughly 2.5% to 5% of US GDP and should contribute to consumer spending. This should benefit mid-caps and smaller companies which are more cyclically sensitive and geared towards economic recovery.”
The US dollar
“The US will increase its deficit significantly as fiscal spending is funded from borrowings rather than higher taxes. To support this, the US dollar will need to be weaker to attract external funding. This is a headwind for UK and overseas investors unless they hedge their US exposure, but longer-term it supports the economic recovery for the US.”
Artemis US Select – Cormac Weldon looks for economically-sensitive companies, particularly focusing on businesses that perform best during ‘growth’ phases of the economy. The team models the impact various scenarios might have on a company’s share price. A key element of their approach is the belief that risk is only worth taking if the potential reward significantly exceeds the potential loss. Meticulous company screening is combined with wider social, economic and thematic research to produce a high conviction portfolio of 40 to 60 best ideas.
JPM US Equity Income – Manager Clare Hart focuses on companies with relatively attractive dividend yields (at least 2% at purchase) and with high levels of dividend cover. She invests in high-quality companies with durable franchises, consistent earnings, high returns on invested capital and strong management. Hart pays attention to capital preservation and tends to favour companies with a sustainable competitive advantage. As a result, the yield on the fund is modest but the strategy should produce a steady income, with the potential to grow over the longer-term.
Schroder US Mid-Cap – Robert Kaynor is a cautious investor and views avoiding losses as the most effective way to grow capital over the long-term. This approach will cause the fund to lag during strong bull-markets but should deliver over time. Companies are chosen based on an analysis of their business model, valuations and their financial statements. The fund invests in three types of stocks: mispriced growth; where the current share price doesn’t reflect the potential growth, ‘Steady Eddies’; companies with stable growth and earnings, and turnarounds; recovery stocks with low or negative growth but where change is occurring.
Adrian Lowcock, Chris Tuite
Head of personal investing Director & Head of Consumer Finance
Willis Owen MRM London
07849 846387 020 3326 9925
Notes to Editors
Willis Owen is one of the UK’s leading online investment service providers. Founded more than 20 years ago Willis Owen now has around £1bn of funds under management and has acted as an intermediary for over 150,000 customers and hundreds of millions of pounds worth of investments,
Willis Owen Limited is authorised and regulated by the Financial Conduct Authority.