What a Biden Victory Could Mean for Investors: Global Fixed Income Team Views

Elections have consequences, as former US President Barack Obama once said, and the election of 2020 will be no different. On a range of issues—taxes, healthcare, energy—President Donald Trump and former Vice President Joe Biden have very different plans, many of which would have an impact on the economy and markets.

In this analysis we will focus on the potential consequences of a Biden victory. That isn’t based on any forecast of the likely outcome. Rather, it reflects the fact that President Trump is a known quantity. He favors low taxes, deregulation, takes a tough line on China and trade, and supports more oil and gas drilling. If he wins, we can expect more of the same. Biden, should he win, would try to move policy in a different direction, so we will concentrate on analyzing his positions.

That said, there are two things investors should keep in mind:

1. Campaign promises don’t automatically translate to actual government programs. In some areas, healthcare for example, where the forces defending the status quo are particularly strong, change may come at a slower, more gradual pace.
2. In the short run, perceptions and headlines can move markets, even if policies don’t change much.

Below is how the Global Fixed Income Team views some key campaign issues:

• Taxes. With the backing of congressional Republicans in 2017, the Trump administration put through a tax bill that cut taxes on corporations and high earners. Biden has said he would roll back a portion of the corporate tax cut and boost tax rates for high earners. While we view a corporate tax hike as a potential headwind, we believe it would struggle to pass unless the Democrats sweep both houses of Congress. The timing of any tax hike would also depend on how well the economy is recovering from the pandemic. Should a tax increase become law, the impact would fall hard on industries like technology and finance, which benefited from the tax cut.
  
  
• China policy. The Trump administration has been steadily severing ties with China, and there is a perception that Biden would be more China-friendly. In our view, those expecting such an outcome will likely be disappointed. We anticipate Biden would return to multi-lateral decision-making with alliance partners, and he would be less impulsive. The result might be a more effective anti-China coalition in the medium term.
  
  
• Energy. Biden would likely be different here. Although he does not say the he would support an outright ban on fracking, he has spoken in favor of restricting fracking on federal lands. Other Democrats have taken a harder line. There is little a Democratic Congress could do to stop fracking on private land, where the vast majority of wells are located. Efforts to slow fracking on federal lands could be tied up in legal challenges. In short, we see more noise than substance here. There is another potential negative for energy under Biden worth mentioning: if he were to strike some type of agreement with Iran—certainly not a guarantee—that could potentially boost oil supplies and put downward pressure on prices. We have been adopting a more cautious stance on the energy sector, including exploration and production names and pipeline companies, largely because of these variables and valuations that looked stretched in some cases.
  
  
• Healthcare. We expect drug prices to be in the crosshairs no matter who wins. The US subsidizes global drug development, and the upshot is Americans have been paying more for drugs than most other developed countries. Arguing for price reductions can be an easy target for politicians across the spectrum. As a result, we have reduced exposure to the pharmaceutical sector. A Biden win could also cut reimbursement for healthcare services and devices. He supports expanding Medicaid, creating a government-run insurance option and lowering the Medicare eligibility age. More people would have insurance under these plans, but that insurance would likely pay less for services rendered.
  
  Here again, we see a disconnect between what has been proposed and what could be politically doable. Healthcare represents over 20% of GDP, and healthcare spending has the support of powerful entrenched interests, including hospitals, doctors and insurers. The Democrats may find that moving health policy is like moving the direction of a battleship: It may happen, but the change is likely to be slow and incremental. Democrats may also struggle to win support from moderates in their own party, who may be wary of dramatic reforms. Given all that, we think healthcare could carry significant headline risk, and possible market selloffs as investors react to those headlines. Should markets overshoot and price in bigger risks than we think are warranted, there might be an opportunity for us to increase our healthcare positions at a later date.

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