The world held its collective breath during the recent US election.
Markets were forecasting a new Democrat president, along with a ‘blue wave’ of power in the House and Senate that would give Democrats the power to easily pass new legislative changes.
Of course, as with any good drama, the election didn’t go quite as anticipated.
Prior to the election, large institutions were calling for higher interest rates on the back of up to $3 trillion more in fiscal stimulus; increased regulation around the technology sector holding back tech stocks after their spectacular year; and global trade was forecasted to pick up as a result of more accommodative foreign policy (with the exception of China).
Although it’s pretty much expected that Biden will take over the Oval Office from 20 January 2021, he will likely face a Republican controlled Senate and divided government, potentially limiting his ability to make major legislative changes.
Shaping the markets
With Biden in office, we expect the following policies to shape markets over the next six to twelve months:
More fiscal stimulus to come, but less than the $3 trillion that Democrats want and not likely until early 2021. This will push bond yields higher but not to the same extent if they’d got a ‘blue wave’ in the US.
Corporate tax hikes are less likely to pass, with the Republicans expected to vote this down, given their likely control of the Senate. This is supportive of corporation profits and since the election, global equities have rebounded 7% through the first week of November – reversing October’s underperformance of 3%.
Gridlock (a split government) will limit major legislative changes, so the future is more certain for the status quo. This eliminates one of the risks for the technology sector where good gains have been a major contributor to our global share investments outperforming world share markets over the past six months.
Foreign policy should be more accommodative for globalism, except for China where we expect a sturdy hand to remain, no matter the election outcome.
Markets have reacted favourably to the election results so far, but volatility is likely to remain until a coronavirus vaccine becomes widely available and further fiscal stimulus is provided to keep the economic recovery from cooling down.
Over the long term, elections have little impact on returns and therefore we’ll continue to position portfolios for the trends that will persist over the next two to five years.
What happened to the markets in October?
New Zealand shares were up over October with electricity generators bouncing back after the Government suggested more support around the Tiwai Aluminium Smelter, which consumes 30% of electricity in NZ.
Australian shares were down a touch over the month as tensions with China escalated further, which has been an ongoing back and forth between the two countries over the past three years.
Yields on global bonds rose through October as calls for more fiscal stimulus gained traction, putting upward pressure on yields with the prospect of more government bond supply to come.
We remain a little cautious on the outlook for rising interest rates and have recently increased our allocation to inflation linked bonds to provide a degree of protection against a potential rise in inflation as economic growth gradually picks up.