Feel the Bern – the risks of the US elections

Feel the Bern – the risks of the US elections

05-03-2020 | 月次アウトルック

Battered markets have a new thing to worry about: the possibility of a socialist US president, our monthly outlook warns.

  • Regina Borromeo
    Portfolio Manager

Speed read

  • Bernie Sanders is a contender for Democratic nomination
  • Socialist agenda includes Medicare for All and tax rises
  • Winning would be bad for pharma, health care and banks

Bernie Sanders has so far done surprisingly well in the race for the Democratic Party nomination to challenge US President Trump in the November election. The 78-year-old senator is by far the most left-wing candidate to challenge for the position in decades.

“In 2019, the main risks to the macro outlook for investors were the trade wars, the global industrial recession and major central bank easing/tightening – issues that are known unknowns,” says Regina Borromeo, Senior Portfolio Manager and Director of Global Macro at Robeco. “For 2020, they are the global spread of Covid-19 and the possibility of a Bernie Sanders presidency.”

“Sanders is an anti-establishment politician and, in many ways, an outsider and disruptor. Since losing out to Hillary Clinton for the nomination in 2016, he has sharpened his process and campaign machine to build a strong base among previously undervalued groups such as young people and Latino voters.”

“Whilst the market base case assumption has been a continuation of the status quo – a Republican President (Trump), a Republican-led Senate and a Democratic majority in the House of Representatives – this time around, Sanders may finally have learned how to win!”

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The odds of Bernie Sanders winning the nomination have risen through Q1 2020. Source: Real Clear Politics

Biden is doing better

Sanders’ main rival is former Vice-President Joe Biden, who did well in the ‘Super Tuesday’ primary polls across 14 states and is much more moderate. “Establishment Democrats are unsure that Sanders’ brand of democratic socialism can win the national vote, since he is much more left-wing than the average American,” Borromeo says.

“Furthermore, long-standing Democrats are wary of insurgent candidates such as Sanders, since he ran as an independent for his Vermont Senate seat, and is only running as a Democrat for the presidential elections. However, his high-energy anti-establishment and socialist messaging against big business and the wealthy has certainly gained traction, whilst the moderate vote has remained fractured.”

“The share of eligible voters from Generation Z (18 to 23-year-olds) will be more than twice as large in 2020 as it was in 2016 (10% versus 4%), which could be beneficial for Sanders. President Trump has shown that political dominance and anti-establishment behavior can win. Sanders would need to mobilize an unprecedented youth vote and expand the electorate to win the Democratic nomination, as well as to beat Trump.”

Universal free health care

So, what does Sanders advocate in such a staunchly capitalist country? “A highlight of Sanders’ campaign is social inequality, and certain policy items focus on this, such as forgiving student debt, free tuition in state universities, a series of tax increases, an increase in the minimum wage to USD 15 per hour, and universal free health care,” says Borromeo. 

“These will be popular among many Americans, but some of his policy priorities are unfavorable for markets.” She says four policies in particular could hammer the markets:

  • Tax increases: Sanders wants to reverse Trump’s tax cuts, restoring the top corporate tax rate to 35% and raising the top income tax rate to 52%. He also wants a tax of 0.5% on stock trades, 0.1% on bonds and 0.0005% on derivatives.
  • Financial regulation: he aims to break up the six largest US ‘too big to fail’ banks, which hold more than USD 10 trillion in assets, and reinstate the Glass-Steagall Act, which separated investment banking from retail banking. 
  • Healthcare revolution: Medicare for All would replace private health insurance with a single-payer federal program, funded by a 7.5% payroll tax on employers and a 4% income tax for employees. He also wants to lower prescription drug prices.
  • Federal spending: a broad range of programs, including housing, education and transportation, as well as the Green New Deal to address climate change. The green deal alone would cost USD 16 trillion over 10 years.

Congress is also being elected

The sectors most directly affected would therefore be pharmaceuticals, health care and banks, Borromeo says. However, investors should bear in mind that Congressional elections will also take place in November, posing problems for whoever becomes president. 

“The two most likely scenarios are either a split Congress – with Democrats controlling the House of Representatives and Republicans controlling the Senate, as in the current situation – or a simple but weak majority by the Democrats controlling both,” she says. 

“In both scenarios, it would be difficult for Sanders to pass most of his signature policies such as Medicare for All, breaking up the banks, his full tax plans and all student debt forgiven,” says Borromeo. “Congressional Democrats would need a united front to pass sweeping legislation against widespread Republican opposition, which would be a high hurdle for many of the controversial Sanders policies.”

Market implications

So, what does this mean for a market being battered by the coronavirus? “A Sanders candidacy turning into a successful run for the presidency will add to the risk-off sentiment and volatility, given his anti-big business views, focus on financial regulation and restrictive tax plans,” Borromeo says.

“Medicare for All would have a high material negative impact on pharmaceutical, dialysis and medical device names, along with health care insurance. And it would have a moderately negative impact on medical equipment and supplies. With increases in volatility, idiosyncratic opportunities will arise though and give value investors the ability to pick winners and losers.”

“Perhaps the final word should rest with John Adams, a founding father of the United States, who served as the second president from 1797 to 1801. He wrote in a letter on 23 March 1776: ‘In politics, the middle way is none at all.’ Both Trump and Sanders have certainly not taken that path.”


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