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Wealth Managers Contemplate Biden Presidency, Policy Limits

Tom Burroughes, Group Editor , November 9, 2020

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Although the election process isn't formally over, wealth managers are starting to plan for life under a new US President, with an expectation that Biden will not have much freedom of action in Congress.

While US President Donald Trump hasn’t yet conceded defeat to Democrat rival Joe Biden, wealth managers are already commenting on the basis that the 79-year-old former Delaware Senator will be taking the oath of office from January next year. One uncertainty - crucial to overall policy - remains whether the Republicans will retain control of the Senate. Run-off races are slated for Senate positions in Georgia in January. That state has traditionally been a Republican stronghold but its politics has shifted in recent years. 

Late last week markets rallied on the view that although Biden is surrounded by Democrats who are often to his left politically, divided government means that he will have limited room to indulge his allies’ Big Government, pro-regulation ideas. 

Such are the complexities of the US system of government with its checks and balances. Trying to read through what this balance means for HNW individuals’ taxes, for example, is not easy. At first blush, it could mean that big tax hikes on “the one per cent” are unlikely, but that doesn’t mean there will not be tax hikes at some point. It is also worth noting, for example, that the doubling of estate tax exemptions brought in during 2017 were due to expire in the middle of this decade if there are no further legislative changes. 

A relatively constrained Biden administration may use executive order powers to make changes, such as around global treaties on climate change, just as Trump, and before that, Barack Obama, did. Such orders, of course, don’t have the staying power of legislation, and make business planning more difficult as a result. 

Anyway, Family Wealth Report is the first to recognize that after this extraordinary election - and with the Trump lawsuits to contest vote-counts - making specific predictions is a fraught business. Here are some comments by wealth managers.

Brian Nick, chief investment strategist, Nuveen
Fiscal stimulus is likely to be the first order of business for the new Biden administration. We still expect something substantial to pass through the Republican-controlled Senate. With the Senate in Republican hands, President Biden might try to enact more of his agenda through executive actions, including stricter regulatory policy in areas like energy and financial services. Infrastructure could be another area of bipartisan compromise, though Republican Senate control may preclude any increase in taxes to pay for new spending.

While fiscal spending, regulatory issues and tax rates depend on the partisan composition of the elected branches of government, monetary policy generally does not. We expect the Federal Reserve to maintain its dovish monetary policy and unconditional support for market liquidity throughout 2021.

Although skepticism about globalization is widespread and increasingly bipartisan, we expect that trade policy will be less adversarial and more predictable with Biden in the White House, with a greater emphasis on multilateral action and global cooperation.

Daniel Gerard, senior multi asset strategist at State Street Global Markets
President-Elect Biden’s win has been embraced by markets as it provides a narrative of desire for reconciliation, diplomacy and more international co-operation will help address economic and public health challenges with a long road ahead in fighting the pandemic and its impact. Low interest rates, low inflation, and supportive public policy will be beneficial for growth equities, especially the consumer, technology and areas of the healthcare sectors. The same factors driving growth equities higher will mean that a challenging environment persists for value spectrum of equities like financials, real estate and traditional energy. Bonds will likely remain stable yet expose investors to asymmetrical risk on the downside with rates near historical lows and spreads compressed.

Asia, particularly EM Asia, will be a strong beneficiary of the current environment due to its relatively better handling of the pandemic, its exposure to technology and recovering consumer, and a recovering global trade story. The two biggest near-term risks to Asia remain renewed geopolitical tensions without a clear goal, and a resurging pandemic reversing gains in global trade. Both scenarios have not been eliminated and need to be watched carefully, but the US election result assuages the risks of either scenario dominating the narrative in the medium term.

Jeffrey Schulze, investment strategist and Josh Jamner, investment strategy analyst, ClearBridge Investments, a specialist investment manager of Franklin Templeton
With his victory, Biden continues a pattern of presidential challengers benefiting from economic weakness during the watch of the prior administration. However, the economy appears to have turned the corner and the ClearBridge Recovery Dashboard remains green with no changes this month. An additional round of stimulus will be one of the new administration’s first priorities, particularly with expanded unemployment coverage expiring at year end for millions. The size of any bill will depend on the composition of Congress, which remains too close to call.

A [fiscal stimulus] bill in the $1 trillion range, representing a compromise between previous Republican and Democrat proposals, seems possible. Senate Majority Leader Mitch McConnell stated his support for a stimulus bill on the day after the election, and going forward his longstanding relationship with Biden could help set the backdrop for more bipartisan cooperation relative to the last several years. Further, several swing-state senators on both sides of the aisle are up for re-election in 2022 and several more are set to retire. The balance of them are Republicans, however, which could further help provide an incentive to get stimulus (and possibly other legislation) passed.

The Global CIO Office
A future President Biden without the likely wholesale support of Congress is unlikely to deliver a significant fiscal package in the early months of 2021. The market is probably right to discount that the Federal Reserve will therefore be called upon to provide further significant monetary policy support to take up the slack from a more modest fiscal package. A greater reliance on monetary policy is likely to keep short-term interest rates emphatically at zero and probably biases long-term interest rates lower at the levels that the market had drifted to in recent weeks.

Some of the aspirational policies of the Democrat party are likely to be far less extreme than would have been the case had the Democrats emphatically carried the Senate. The market is probably right to have discounted the possible scaling of green policies and redistribution of wealth. Biden's climate plans were previously to spend $2 trillion in four years. However, President Biden should be able to carry out some degree of repositioning of the US with a likely canceling of the withdrawal from the Paris accord.

US corporate tax higher, but not so high. Joe Biden committed to taking the corporate tax rate back up to 28 per cent from 21 per cent but not to the 35 per cent that prevailed before. However, even an increase to 28 per cent looks challenging, given that Biden has to negotiate with a likely Republican-led Senate. However, over the medium term, something is going to have to give. Someone is going to have to pay for the stimulus program unless it is “wished away” with the Fed buying all the US Treasury issuance.

More infrastructure spending. Whichever way you look at it, the US needs to spend on infrastructure urgently. Whether it is to boost GDP, to support green issues or to repair the creaking infrastructure of the US, this will be spending that should be easier for all to support.

Logical, not emotional pressure on China. The Chinese may be relieved that Trump noise will abate. However, as a maid-in-waiting of the largest economy in the world, they will be hoping for a more logical path of competition in the future. We expect some of the less rational tariffs that hurt US consumers to wane. Still, Biden has the benefit of starting his negotiation with China from a position where leaving things where they are is a sufficient threat to bring some compromise from China.

UBS CIO Office
Overall, we retain a pro-risk stance. We think the best course of action is to operate under the assumption that the election is over and expect market focus to shift to medium-term drivers of economic growth. These include COVID-19, vaccine developments, and monetary and fiscal stimulus. 

We remain optimistic that we will see an approval of a coronavirus vaccine in the coming months, with a rollout in the first half of 2021, and expect monetary and fiscal stimulus to remain supportive of equity markets. We acknowledge that the move higher in the past week has increased valuations, in the US in particular, but believe that the next leg higher for equities will be driven by more economically sensitive parts of the market, such as mid-caps, industrials, and other select cyclicals “catching up” with the secular growth names. For investors looking to reduce portfolio risk following last week's run up in US equities, or who see tail-risk concerns around the peaceful transition of power in the US, structured products can be an effective means of implementation.

Large-cap technology stocks rallied strongly on election week, which, in our view, was due to lower bond yields and greater regulatory certainty than under a Blue Wave. Investors also seem to have been rotating back into growth “safe havens” due to a likely watered-down fiscal stimulus. Looking forward, we continue to believe there is upside for markets in the months ahead, although we expect it to be driven by more cyclical parts of the market.

We still expect a sizable fiscal package, approximately $500 billion to $1.0 trillion, or 2.5–5 per cent of GDP, to support growth. We also expect a broadening of the economic recovery aided by the widespread distribution of a vaccine by the middle of next year. In this environment, mid-caps should be well-supported. Within technology, recent strong company results in segments like supply chain, payments, and digital advertising support our recommendation to broaden exposure into more cyclical areas of tech, which have lagged so far, rather than areas like e-commerce and software which have outperformed through the pandemic.




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