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All eyes on fiscal stimulus as US awaits election results

All eyes on fiscal stimulus as US awaits election results

04-11-2020 | Insight
Investors should focus on likely levels of fiscal stimulus from the eventual winners of the US elections, says multi-asset investor Jeroen Blokland.
  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager

Speed read

  • Trump and Biden currently neck and neck in presidential race
  • Combination of who wins Presidency and Congress is critical
  • Fiscal stimulus levels will vary according to final results

The outcome was unknown at 11am CET on 4 November, with Republican President Donald Trump and his Democrat challenger Joe Biden neck and neck in the race for the White House. The Democrats were favorites to retain control of the US House of Representatives, but the contest for currently Republican controlled Senate was more finely balanced. Predictions for a ‘blue sweep’ – where the Democrats win everything – have not materialized.

“I really think it's difficult to say who is going to win, which means you should not take a position on this at all until we know for sure,” says Blokland, senior portfolio manager and Head of Robeco’s Multi-Asset team. “Currently it’s hard to say who will win, which makes life pretty easy because you don't have to do anything unless you had positioned yourself for one of these outcomes (we didn't).”

“We’re currently neutral in the portfolio. We have a 1% overweight in commodities, and if Trump does win, commodities like oil would probably rally. Tech stocks are likely to continue to outperform. We have seen some unwinding of the ‘blue sweep’ trades, which have all gone down, while everything that is value is cyclical. The euro/dollar has gone down, and there has been a sharp drop in the 10-year US Treasury bond yield, which is down 10 basis points now.”

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Majorities are key

Blokland says what really matters is whether there is a clear majority for either the Republicans or the Democrats in the White House and Congress. This will determine the level of fiscal stimulus to combat the coronavirus economic slowdown, and ultimately the earnings of companies in which his fund invests.

“Fiscal stimulus could be anywhere around USD 2 trillion with a clear majority for one side in the House of Representatives and Senate, and perhaps only half a trillion if you get stuck in one of these middle outcomes,” he says.

Differing outcomes

“If Biden wins, then two things will happen. If it's a blue sweep, then you will get a massive amount of fiscal stimulus, but you also get things like minimum wage hikes and tax rises. So, companies’ earnings per share are likely to go down a little bit on that.”

“In such a blue sweep, you should buy everything outside of the US, because there would be massive bond issuance, a lower dollar, and lower spreads from lower geopolitical tensions, since Trump is clearly going to go hard after China if he wins.”

“If it’s marginal, you still get the stimulus, but the Republicans will block any minimum wage legislation, and calculations suggest that earnings per share may actually go up in this scenario. If Biden wins but you also have a Republican Senate, then the least amount of fiscal stimulus would occur, and the calculation there is for a slightly negative impact on earnings per share.”

Search for a vaccine

However, all this is not all that significant when considering that the biggest stimulus of all would come from finding a cure for the coronavirus, he says. “What the world really needs is a vaccine, and a return to some kind of normal, in which case we could see earnings per share rise by 20%,” Blokland says.

“The variation in EPS under different elections scenarios are much smaller in magnitudes, as stimulus and potential tax hikes cancel each other out.”

“So, for sure, we have all these combinations of potential outcomes, but the overall impact on earnings depends on the vaccine, not on the US elections.”

The final results of the elections may not be known until Friday 6 November, and could still be subject to legal challenge by one side or the other.

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