Prepare your portfolio for US election volatility

The surge in COVID-19 infections has preoccupied financial markets in recent weeks, overshadowing the run-up to the November US presidential election. But as the contest enters its final months we expect this to change, as investors consider the significant implications the outcome could have on their portfolios.

The 2016 contest had a marked impact on markets, with President Donald Trump's surprise win causing stocks, credit, and the US dollar to rally as investors anticipated a combination of lower taxes, looser regulation, and higher fiscal spending. At the start of the year, the election was President Donald Trump’s to lose, with a campaign bolstered by a strong economy and the unemployment rate at a 50-year low. The economic disruption caused by the coronavirus pandemic has changed that; the President's approval rating has collapsed and he now lags behind Democratic candidate Joe Biden in the polls.

Last week, Biden announced a plan to “Buy American” with government purchases of USD 400bn of US-made goods and USD 300bn of R&D spending on US technology such as 5G and electric vehicles. While these proposals seek to address President Trump’s key issues of the economy and nationalism, for the most part there is a stark contrast between the two candidates’ platforms. This suggests that investors should once again brace for volatility and potentially large market moves.

While both candidates have emphasized the need for more infrastructure spending, there are few other similarities. President Trump has indicated he would focus on deregulation, an “America first” approach to international trade, and tax reductions. Biden, by contrast, would seek to increase spending on climate change mitigation, expand access to federally funded healthcare, and raise taxes on corporations and high-income earners.

This policy divergence has important implications for US sectors. We have developed three election equity baskets to help investors navigate the contest:

A Blue Wave:

• The Democratic Party takes both the Presidency and wins a majority in Congress: We would expect outperformance by stocks exposed to energy efficiency, smart mobility, and renewables as President Biden adopts a green agenda. We also highlight companies that are more insulated from an increase in corporate taxes and those that could benefit if trade tensions cool. Within healthcare, we focus on companies that could benefit from an expansion of healthcare coverage.

A Red Wave:

• The Republican Party takes both the Presidency and wins a majority in Congress: Select energy and financial companies could benefit from a “relief rally” that tighter regulations from a possible Biden administration are avoided. The Trump administration has been supportive of further developments in space technologies, and defense companies could also enjoy support in a Trump second term. Within healthcare, our selections are focused on managed care companies, which also avoid the risk of changes in healthcare coverage from a potential Biden victory.

Campaign warriors:

• With the contest still around four months away, there is still time for political shifts in the US, and many investors may prefer to keep politics out of their portfolios. Therefore, we have also highlighted a number of stocks that are relatively insulated from campaign issues. These include companies in communication services, companies with a diverse revenue stream or diversified content, consumer staples, and portions of the IT sector that have remained out of the regulatory spotlight.

For more on the implications of the US election on markets, read our latest ElectionWatch report, "Investment implications of the 2020 US elections."

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