The good and bad of a Biden presidency

Below is a commentary I wrote that was published by The Straits Times here.

The United States presidential election is just around the corner and if the polls are right, former vice-president Joe Biden is set to take control of the White House for the next four years.

Our policy team sees a 55 per cent chance that Democrats complete a full sweep of both branches of Congress and the presidency, versus just a 28 per cent chance of Republicans holding on to the Senate and White House.

President Biden would look very different from President Donald Trump. Besides their social media habits, the two share very little in common in terms of their policy stances and world views.

One favours multilateralism, the other unilateralism; one wants to raise corporate taxes, the other wants to keep them low; one hopes to build a green economy, the other supports a fossil fuel-run one.

Asia is a trade-oriented bloc that is much impacted by US-China tensions. A potential leadership change in the White House would have significant ramifications for the region.

WHAT A BIDEN PRESIDENCY WOULD LOOK LIKE

With Covid-19 cases surging and businesses suffering, the US is in desperate need of stimulus. The Democrats want an outsized Bill that - among other forms of aid - sends new stimulus cheques to citizens, while the Republicans want a leaner one that covers only unemployment benefits and liability protection for enterprises. Both sides have dug in for now and are not willing to compromise.

If Democrats surge to power in a blue wave and gain a strong enough foothold in the Senate, they could secure the 60 votes needed to advance their fiscal plan; likewise, a red wave would make the Republican plan more likely.

The Bill's passage - whether it is written by Republicans or Democrats - would be a significant tailwind for the economy that fans demand from consumers and businesses, and equity markets are likely to react favourably. And what is good for the world's biggest economy is good for Asia's, as the growth would trickle in to the region's exporters.

A blue wave would also usher in a new era of US environmental leadership.

Mr Biden's climate and environmental justice proposal pledges to make a federal investment of US$1.7 trillion (S$2.3 trillion) over the next 10 years in areas like clean energy and infrastructure, leveraging additional private sector, state and local investments to total more than US$5 trillion. This would be a windfall for firms leading in the development of eco-friendly technologies, such as Japanese automakers and Chinese solar manufacturers.

On the downside for markets, Mr Biden's tax plan would see meaningful raises for corporations once post-election fiscal spending puts the economic recovery on a firmer footing.

The stakes have never been higher for a US presidential election, but for investors, the strategy remains the same - stay invested and diversify across sectors, regions and assets.

Democrats also seek tighter regulations on industries like energy. Such measures could dampen investment and spending, but the economic drag should be more than offset by the fiscal boost and the administration's focus on infrastructure, green initiatives and potentially healthcare coverage expansion - spending that could exceed US$4 trillion in total.

THE ELEPHANT IN THE ROOM - CHINA

For Asia, all eyes are on China. Relations between China and the US are at their lowest point in decades, and countries like Singapore are forced to tightrope-walk between the two economic powerhouses. This balancing act will continue regardless of who wins the White House, but US policy would likely be more predictable and pragmatic with Mr Biden in power.

The long-time politician's inclination to use diplomacy over tariffs as a tool to exact his foreign policy goals would create a more certain environment, giving firms and investors more clarity about the future. Pressure would still be heaped on China, but it would likely be more targeted at specific issues such as human rights, and less impactful to the broader region. Mr Biden also reportedly plans to enlist allies to sway Beijing, instead of going at it alone.

The relationship certainly would not be a happy one, but it would be less volatile than it is now. In fact, while competition and confrontation will continue, a return to economic cooperation where mutual interests prevail is also possible. Mr Biden's green initiatives would likely require manufacturing support from Chinese firms. Even technology may see some areas of improved cooperation, such as in cyber security, or at least less hostility. This is good news for Asia's IT supply chain and especially Chinese technology firms, which are set to enjoy strong support from Beijing for a long time.

Indeed, the experience of the past four years has convinced the Chinese government to speed up various market reforms. Beijing's upcoming 14th Five-Year Plan is expected to focus on four major themes: the "dual-circulation" strategy led by domestic demand, tech self-sufficiency, urbanisation 2.0 and the green economy. The priorities set forth are ambitious, and achieving them will require robust investment and policy support. Asian companies leveraging these trends should benefit from Beijing's helping hand.

STAY INVESTED REGARDLESS OF ELECTION OUTCOME

Equity markets have been jittery of late. But, regardless of the outcome of the US election, investors should stay in the market and position for potential equity upside ahead.

Vaccines are likely to be widely administered from the middle of next year, prompting mobility restrictions to be eased in many countries. This should cause earnings to rebound globally and the economic recovery to broaden out.

Lagging equity markets in Singapore, Britain, and the small/mid-cap segments in the US and Europe should catch up in the year ahead, as cyclical sectors benefit from the greater normalisation of private life.

The risk of a contested election outcome is not insignificant, however. Unlike past elections, the results may not be known immediately because of the widespread use of mail-in voting; only eight states expect to have at least 98 per cent of unofficial results reported by noon the day after the election, according to The New York Times. The markets will not respond positively to an unknown result, or a disputed one. In the case of the contested 2000 election, there was a gap of 36 days, during which the S&P 500 fell 5 per cent.

The stakes have never been higher for a US presidential election, but for investors, the strategy remains the same - stay invested and diversify across sectors, regions and assets.

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