Politics, policy and your portfolio

The US election campaign has entered the final stretch. Against the backdrop of a continuing rise in COVID-19 infections, investors are eager for clarity on US public policy—with wide gaps between the two candidates on a range of issues from the response to the pandemic to ecological regulation, and relations with China.

Democratic candidate Joe Biden continues to hold a wide lead in polling averages, and at the time of writing is ahead by 8.5 points according to the FiveThirtyEight national average and by 7.2 points in the RealClearPolitics (RCP) average. However, Biden’s lead is a narrower 3.3 points in RCP’s average of top battleground states, which will likely decide the election. Large numbers of people have taken advantage of early voting procedures. Some 93 million early votes had been cast as of Sunday, according to the US Elections Project tracker, or nearly 68% of the 2016 total. The Pew Research Center expects the total to rise to more than 150 million by Tuesday.

A contested election cannot be completely discounted. The COVID-19 pandemic has triggered an unprecedented surge in litigation related to how, and when, votes will be counted. There are more than 350 lawsuits now underway in 44 states contesting the conduct of the election, ranging from the location of ballot drop boxes to the requirement of a witness signature in some jurisdictions. The latest forecasts from the UBS US Office of Public Policy assigns a 55% probability to a Blue Wave, where Democrats capture the White House and both chambers of Congress. A status quo result, with the president eking out narrow wins in battleground states, is the next most likely outcome, with a 28% probability.

The election result will likely have significant implications for US fiscal policy and its COVID-19 response. We also see a range of sectoral implications, especially on green sectors and the fossil fuel sector.

• Sustainable investing. Biden has proposed a USD 2tr plan to expand the use of clean energy in the transportation, power generation, and building sectors. He has claimed this would create 18.6 million jobs and would likely boost sectors like electric vehicles and renewables, while the energy sector could lag. President Trump has defended his exit from the Paris Agreement on economic terms, arguing for protecting jobs in the US energy sector and ensuring US energy independence. In a second term President Trump has promised to continue trimming regulations on businesses, including shielding fossil fuel firms from tougher regulation. But, we also note that while President Trump’s policy proposals have not highlighted a green agenda, sustainability indexes have performed well over the course of his first term, and state laws are also influential in green regulation. Read more on sustainable investing here.
• Fiscal policy, COVID-19, and the economy. Talks between Democrats and Republicans have failed to deliver a fresh fiscal stimulus package ahead of the election. We expect further stimulus to be agreed after the vote, regardless of the outcome. But the package will likely be larger in the event of a Blue Wave, based on proposals made by the two parties in the talks. While a Blue Wave outcome would likely lead to higher taxes and tighter regulations over the medium term, we expect the near-term focus would be on stimulating the economy. On COVID-19, Trump and Biden have taken different postures. President Trump has pushed for a swifter reopening to reduce further job losses. Biden has vowed “to shut down the virus, not the economy,” with free testing and paid leave for those affected by the pandemic.
• Trade talks with China. A tough negotiating stance with China has been a hallmark of the Trump administration. We think a potential Biden administration would feature more predictable and less openly hostile policy toward America's largest trading partner, benefiting export-sensitive sectors in Asia. Still, an increasingly bipartisan consensus on China in Washington may preclude major changes, and we see a continuing shift toward a more bi-polar tech world centered on the US and China. Since this is less efficient, it will further increase the cost of developing tech infrastructure like 5G, benefiting the companies involved. We continue to see compelling investment opportunities in disruptive technology firms and enabling technologies, including 5G equipment makers. Read more here.

Volatility is likely to remain high into the election, and possibly beyond in the event of a contested election. But overall we recommend looking through the near-term noise and seeing volatility as an opportunity to build long-term equity exposure. The medium-term path for markets is more contingent both on fiscal stimulus and on vaccine approval and distribution rather than the election result. In our base case, we expect a vaccine to be widely available by 2Q21, and some form of fiscal resolution after the election, and we recommend investors position in a diversified way for further upside for equities.

Visit our website for more UBS CIO investment views.

Please visit ubs.com/cio-disclaimer #shareUBS