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A key thread running through our analysis is the immense uncertainty which still surrounds the election.
More question marks than usual
SO WHAT DOES THAT ALL MEAN FOR YOUR INVESTMENTS?
The problem we face as long-term investors is that much of what the future holds is fundamentally unknowable and therefore unpredictable, but we cannot avoid making judgments about it. We’ve tried to draw out three simple and relevant features of the changing investment landscape that we can have some confidence in, even if we can’t foresee exactly what will happen.
Higher rates
Bonds
equities
As noted above, inflation and interest rates are both likely to be higher and more volatile in the coming decade than they were in the 2010s. Not a repeat of the 1970s, just a return to more ‘normal’ historical levels after the extreme lows of the years after the global financial crisis.
Diversifying assets
Inflation and interest
The long-term returns available from bonds have jumped, as yields have risen substantially. But their volatility has probably also increased. We can’t rely on safer bonds alone as an offset to equity risk, so diversifying assets (like gold and selected hedge fund strategies) remain vital for mitigating risk while preserving returns.
Fading dominance
Equities still appear capable of delivering returns well in excess of inflation. But the distribution of returns within equity markets is likely to look quite different to the past ten years, with the remarkable dominance of the US fading.
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Republicans and Democrats are poles apart on areas like corporate tax, energy policy, immigration and much more. That’s a key reason why this election looks more consequential for investors than the typical contest of the past few decades. The gap between the parties’ offerings has grown, and the breakdown of the previous economic consensus has expanded the options they’re willing to consider.
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The problem we face as long-term investors is that much of what the future holds is fundamentally unknowable and therefore unpredictable, but we cannot avoid making judgments about it. We’ve tried to draw out three simple and relevant features of the changing investment landscape that we can have some confidence in, even if we can’t foresee exactly what will happen.
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The election isn’t everything. We should take care not to premise our portfolios too heavily on any single election outcome.
NAVIGATING AMERICA’S DIVISIVE ELECTION
POLLS APART
This infographic illustrates the political landscape of the United States during the 2020 election, showing how each state voted. States are colour-coded to represent whether they leaned Democratic or Republican in the presidential race.
This infographic illustrates the weight of each state in the Electoral College, demonstrating how the number of electoral votes varies by state. Larger states with higher populations have more influence, as indicated by their greater number of electoral votes. The graphic underscores the importance of each state's contribution to the total 538 electoral votes that determine the outcome of U.S. presidential elections.
Trump’s platform, though potentially more inflationary, contains a very significant positive offset for the US stock market: corporate tax cuts. He’s also proposing deregulation for certain sectors, but the effects of these proposals on stocks are more ambiguous and probably smaller. However, equities outside the US generally won’t benefit from these changes, and they may be more vulnerable to Trump’s proposed ‘universal tariff’ on all imports. Still, it’s far from clear that he would or could enact this.
TRUMP TAX CUTS COULD GIVE A BOOST TO US STOCKS, OTHER MARKETS LOOK MORE VULNERABLE
Regardless of the election result, large government deficits (when spending exceeds revenues) and high public debt relative to the size of the economy appear to be here to stay. During their presidencies, both Trump and Joe Biden have overseen unusually large peacetime deficits (even outside the extraordinary circumstances of the pandemic), and there is no indication that Vice-President Harris would diverge from this path if she became the President.
Neither candidate’s party has put any emphasis whatsoever on reigning in the ballooning government deficit. Taking all of the potential policy changes in the round (see more below and in the full report) the risks of a widening deficit, and therefore risks to US government bonds, are probably greatest if Trump wins the election. But the precise effect will depend enormously on which of his proposals he’s able to enact.
DEBT-FUELLED GOVERNMENT SPENDING IS HERE TO STAY
WATCH OUR VIDEOS TO FIND OUT MORE ABOUT SPECIFIC POLICIES:
Trump intends to change the direction of US energy policy fundamentally if elected, rowing back on the Biden administration’s support for clean energy and goals for ‘net zero’ carbon emissions. Parts of this agenda could be implemented easily by executive order, such as leaving the Paris Agreement and UN climate bodies, or rescinding Biden-era orders restricting fossil fuel leases on federal land. But other elements may prove much harder even in the event of a Republican ‘sweep’.
Even though congressional Republicans universally voted against the passage of Biden’s misleadingly named Inflation Reduction Act (which was really focussed on climate policy), many may be unwilling to vote for its repeal. The key reason is that funding for clean power from the Act has disproportionately benefitted Republican areas of the country. Remarkably, more than 80% of all utility-scale wind, solar and battery projects currently under development are in Republican-held congressional districts, as these two charts show:
FOLLOW THE CLEAN-ENERGY MONEY
The impact on US equities is less certain (with different policies working in different directions) but could plausibly be positive in the short to medium term. However, the risks to equities outside the US (especially in China) appear greater. They won’t benefit in the same way from lower US corporate tax rates, and they are probably more vulnerable to increased tariffs and trade friction.
WHAT WOULD A TRUMP VICTORY MEAN FOR YOUR INVESTMENTS?
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Several of Trump’s policies add to the risk of higher inflation, and would bring greater risks for US government bonds (particularly if the Republicans control Congress). Arguably none substantially reduce these risks.
Remember the bigger picture. The largest investment impacts may be at the sector level, but making judgements about sectors based on the election alone can be dangerous. Trump’s time in office demonstrated that legislative changes aren’t everything. Sectors with de-regulation in their favour can still underperform substantially if other things go against them. Trump’s agenda arguably favours fossil fuel producers, banks and traditional car manufacturers – but this alone won’t decide their fate.
This inflation risk is another reason why this election matters, given the context of how strong price pressures have been recently. It is also a risk to US government bonds. Arguably, none of Trump’s policies would reduce inflationary pressures.
3. And much more aggressive action on trade is possible, even if Trump’s proposed 15% ‘universal tariff’ isn’t implemented in full.
2. Labour supply would be restricted as Trump’s ‘America First’ agenda cuts immigration.
1. The government’s budget deficit would probably be larger than otherwise given Trump’s plans to cut corporate tax rates.
At the highest level, Trump’s proposals appear more inflationary than the Democrat alternative:
HIGHER INFLATION UNDER TRUMP
Figure 2: US deficit as a proportion of GDP (%)
Forecasts suggest the US debt will reach new record highs relative to the size of the economy in the next decade and continuing to climb.
Source: Congressional Budget Office, latest annual figures; primary deficit = current spending minus tax revenues and net interest outlays = interest paid in excess of interest received
Source: Brookings analysis of US census data; as at end August 2024
Based on what happened during his first presidency, net migration is likely to fall if Trump wins the race to the White House.
Figure 3: Net international migration to the US (000s)
Source: FRED database, St. Louis Federal Reserve; latest annual figures
Trump’s proposed ‘universal’ tariff would more than treble the average rate imposed on imports from China, which would have a one-off inflationary impact.
Figure 4: Average US tariff
rate on all goods imports (%)
Source: LSEG, Rathbones; as at end August 2024
Company earnings are likely to rise under the Republicans and fall under the Democrats as a result of their tax policies.
Figure 5: US corporate tax rate (%)
Source: Congressional Budget Office, Rathbones; latest annual figures
US government debt looks likely to continue rising sharply relative to the size of the economy, regardless of who’s in the White House from next year.
Figure 6: Debt as a % of GDP
Biden’s presidency has seen a step change in US industrial policy after decades on the margins. Several acts have been passed totalling more than $2 trillion in public and private spending over the next 10 years focused on rebuilding and improving US infrastructure, supporting US semiconductor production and leadership in advanced technologies and addressing domestic energy security and climate change.
This chart shows the significance of the increase in spending on climate change alone, which would be under threat in a Trump presidency:
Industrial policy (the government investing in strategic parts of the economy) has experienced a renaissance around the world recently amid rising geopolitical tensions and the need for resilience to shocks like the pandemic or climate change. Both Democrats and Republicans have supported this shift, so activist industrial policy looks set to stay – but there are also clear differences in the strategic sectors they care most about.
Sources: The Economist, Credit Suisse; as at end August 2024
Three acts passed under Biden’s presidency resulted in a substantial increase on spending on measures addressing energy security and climate change.
Figure 7: US Federal spending on climate change ($bn, annual average)
INDUSTRIAL POLICY WILL STAY ACTIVIST TOO, BUT IN WHO’S FAVOUR?
Industrial policy (the government investing in strategic parts of the economy) has experienced a renaissance around the world recently amid rising geopolitical tensions and the need for resilience to shocks like the pandemic or climate change. Both Democrats and Republicans have supported this shift, so activist industrial policy looks set to stay – but there are also clear differences in the strategic sectors they care most about.
Source: American Clean Power, according to 2020 US presidential election
In particular, Republican states make up the largest share of clean energy generation.
Figure 9: Wind and solar share of electricity generation in the top 10 US states (%)
Industrial policy (the government investing in strategic parts of the economy) has experienced a renaissance around the world recently amid rising geopolitical tensions and the need for resilience to shocks like the pandemic or climate change. Both Democrats and Republicans have supported this shift, so activist industrial policy looks set to stay – but there are also clear differences in the strategic sectors they care most about.
Source: American Clean Power; according to 2020 presidential election
Funding for clean power following the Inflation Reduction Act has disproportionately benefited Republican states.
Figure 8: Clean power installations in the top 10 US states in 2023
Gated content?
Source: CNN
Figure 1: 2020 US Presidential election results by state
When you cut through the fog of the emotive and partisan headlines, the broad features of the investing landscape look like they are here to stay as former President Donald Trump takes on Vice President Kamala Harris – both have embraced protectionism and an active government role in directing investment, and are tolerant of taking on more debt. Yet their two parties agree on little beyond these general principals.
Given the likelihood that a Harris victory would largely maintain the status quo, this report will focus mainly on what a Trump presidency could mean for your investments.
As always when it comes to elections, we should not forget the bigger picture either – the trends in the global economy and markets, which are beyond the direct control of any individual politician or party.
Corporate tax
Geopolitics and defence spending
Trade policy and China
Industrial policy
Energy policy
Antitrust and deregulation
Immigration
The dollar
Debt and the deficit
Fed independence
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Trump’s proposed ‘universal’ tariff would more than treble the average rate imposed on imports from China, which would have a one-off inflationary impact.
Source: FRED database, St. Louis Federal Reserve; latest annual figures
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Second, even once the result is clear, there are more question marks than usual about how campaign-trail rhetoric will translate into actual policy.
First, there’s uncertainty about the result (click here for the latest polls).
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Corporate tax
GEOPOLITICS
Trade Wars
Debt
Industrial Policy
Energy Policy
ANTITRUST
IMMIGRATION
THE DOLLAR
FED INDEPENDENCE