united kingdomen
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.”

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

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.

Subjects related to this article are:
Logo

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree