Taxes and tantrums: How the US election could impact investors

All eyes are on the US as the country gears up for the election to decide who becomes the most powerful person on the planet for the next four years. For investors, it’s especially important to watch closely given the US is the world’s largest and most influential economy.

In the contest between Joe Biden and Donald Trump, US voters face a clear choice between two very different candidates who are poles apart on a number of policies, many of them relevant to investors.

If Biden gets the keys to the White House, it’s likely to lead to a bigger tax bill for businesses – he proposes raising corporate income tax from 21% to 28% – and could mean tougher regulation too. Taxes take a bite out of company profits while regulation creates costs, both of which could impact dividends and equity prices.

President Trump, on the other hand, has a more ‘pro-business’ approach but is unpredictable. Policies announced out of the blue, often via Twitter, have seen markets lurch up and down as investors try and keep up with their significance. Stocks dropped last August after he tweeted  confirmation of more tariffs on China, before bouncing back in November when he used social media to announce the ‘Phase 1’ trade deal.

While these risks don’t pose any immediate threat to markets, they’re among the many considerations we’re monitoring. The reality is that whomever gets into the Oval Office will need to ensure measures are put in place to support the US economy through the global pandemic and recession. Governments and central banks around the world have done a pretty good job providing stimulus so far, and that is likely to continue.

Stimulus package and low rates present opportunities

Lilian Chovin, Coutts Head of Asset Allocation, believes that the “sheer amount of money flowing” in the US could lead to positive opportunities for investors.

“The post-pandemic stimulus package being debated in Washington, and the Federal Reserve’s low interest rates, should still be in play following the election,” he says. “That means plenty of money for the next President to spend.

“The question for investors is: what will they spend it on?

“For example, if the Democrats win, we should see a huge increase in spending on the green agenda – something that isn’t really on Trump’s to-do list at all. If Biden becomes President, there could be very strong investment opportunities in industries that are key to a less carbon-intensive economy, like green tech or renewables. He has already announced $2 trillion investment over four years to tackle climate change.

“But if Trump wins, his plans to spend on infrastructure, alongside corporate taxes staying at current levels, could lead to broader benefits across a range of sectors.”

Tech and health care – the ones to watch

As well as the environment and infrastructure, technology and health care could end up as political (American) footballs during the presidential campaign.

Politicians on both sides have previously voiced concerns over drug pricing that, if turned into policy, could hurt the profitability of health care companies.

The tech industry has also attracted cross-party negative attention. When he was Vice President, Biden spoke in favour of keeping the internet free and open. This stands in the way of some big tech companies’ plans to offer favourable terms to certain content providers. The Trump administration, in the meantime, has launched antitrust probes into the sector.

Neither candidate has spoken of breaking up the tech giants but that remains a possibility, although its impact on share prices is hard to predict.

Lilian comments, “From an investment perspective, this election is primarily about sectors, and technology and health care are probably the two most important. Both play a vital role in the US economy and therefore global markets – they led the stock market recovery following the coronavirus crash in March. Any major changes could therefore have significant repercussions across markets.”

Expect ongoing tough talk with China

The fragile relationship between the US and China – the world’s second largest economy - is another big issue, and one we wrote about in detail back in June. Tensions remain taut, with spying accusations and consulate closures adding to the mix alongside the well-worn back and forth on trade.

Trump could continue to talk tough on the issue to rally voters before they go to the polls – a strong position on China is popular among the American people. This bellicose stance makes investors very nervous though.

China is vital to world trade – as part of the supply chain for many major companies, like Apple – and is itself an increasingly important market. The re-introduction of trade friction, or even the threat of it, could pose a risk to global markets in the run-up to the election and beyond.

But this isn’t a Trump-only issue. Its importance to the US electorate means Biden will also be firm with China, albeit with a potentially more measured style.

Lilian says: “Trump doesn’t want to do anything to harm the US economy, so he has been careful not to go too far with China. But given his unpredictability, who knows what he might say or do between now and the election?

“Biden would also adopt a hard stance on China, but I suspect would work with the country’s allies – like Europe and the UK – to try to get a good result.”

If you’d like to talk more about the Coutts view on the US election, or any other issue important to your investments, please call your private banker or wealth manager.

When investing, past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.