How to profit from a likely victory for Joe Biden in the US Presidential election.

Summary

The opinions polls point to a likely victory for Joe Biden in the US Presidential Election.

While markets have partly repriced the “risk” of a Biden victory they have not fully focused on the sector and  portfolio implications of this. Part of the reason for this is that news and attention is dominated by the dysfunctional US political situation and the Coronavirus epidemic.

In September, the US stock markets have corrected significantly and the negative market level “risk” represented by a Biden victory is priced in but the longer term sectoral and portfolio implications of a Biden victory have not been  thought about and priced in.

In the next few months, we are likely to see a lot of progress in the search for a Coronavirus vaccine. This means that the Coronavirus will quickly be in the rear view mirror as far as the markets (which are always forward looking) are concerned. This is likely to be very positive for risk assets in general and is likely to lead a new cyclical advance in stocks.

A Biden victory will favour certain stocks and sectors such as Financials, Industrials, REITs and will be negative for some sectors such as Energy.

How to profit from the Biden victory ?

Opinion Polls point to a consistent lead for Joe Biden. Biden has consistently maintained a 7% lead in opinion polls and a 3.8% lead in the key battleground states such as Florida, Pennsylvania and Michigan where the US Presidential  election are decided. The Trump style is very effective in holding on to his core base of 40% to 44% but is not well-designed to get new votes from outside his base.

America allows early voting in many states and given Covid worries, large numbers of people have voted either in person or through postal votes. Therefore, even with six weeks to go, the window for President Trump to catch up is a narrowing a little.

However, anything can happen in a six-week campaign. The key issues on which President Trump is weak will be his handling of the Covid crisis while he will be strong on Law and Order and the Economy. Trump will try and focus on the latter two issues as well as pointing out Joe Biden’s advanced age and possible physical and mental frailty. Another major issue will be the appointment of a new right-wing Supreme Court Judge which Trump is determined to push through. However, this could be a potential trap for Trump as Democrats could argue that the resultant stronger Conservative majority in the Supreme Court is more likely to lead to the abolition of Affordable Care Act. This could be an effective Democratic strategy as the experience of the Coronavirus epidemic has meant the US voter now puts a much higher value to public healthcare provision. There may be a significant increase in market volatility between now and the election day and indeed beyond if the result is delayed but the result is much more likely to be a Biden victory than a Trump victory.

US Stock markets had Coronavirus scare in late February 2020 and fell 30% from 19th Feb before bottoming out on 20 March 2020. Between 20 March and Early August, the S&P 500 rose over 50%. In September 2020, the S&P 500 has declined about 8.5%.

The September correction was not unexpected given the speed and magnitude of the rise in the market since March 2020. However, we believe, it was also a Biden correction. The media has reported that a Biden presidency will mean higher taxes including higher Capital Gains taxes and thus it makes sense for investors to sell stocks which had appreciated most. The fact that formerly high- flying tech stocks fell the most in September is consistent with this
thesis. However, we believe that this decline is now largely done and the market is now looking ahead to the election at a more sustainable level. However, the daily news cycle is still dominated by the daily political developments and Coronavirus trends and market participants have not given much thought to the sectoral impact of a Biden Victory.

We believe there will be positive news on a Coronavirus vaccine in the next few weeks and months and stock markets will rise in anticipation of the economic boost that an effective vaccine will lead to. This will happen at a time when the medical facts on the ground in terms of numbers of cases and infections still look quite difficult. Markets are forward looking and will at this stage be looking beyond the Coronavirus and the re-opening of the global economy. Therefore, a Biden Presidency will begin with the backdrop of a positive market trend but some sectors will perform better than others.

The Fed has stated that it will keep short-term interest rates at near zero for some time and this will not change. However, bond markets will fear increased government spending and this will lead to a steepening of the yield curve. A steeper will boost share of banks and other financials which have underperformed for the last few years.

A Biden government will try and boost the economy through spending on infrastructure and housing and this will benefit cyclical sector such as Industrials.

The REIT sector should also do well in an environment where taxes are rising. REITs can maintain their favoured tax status provided they distribute 90% of their income. We would expect some safe-haven buying in REITs in a environment of rising taxes.

A Biden government will try to boost clean energy and tax polluting industries. This will be negative for sectors such as Oil and Gas and Coal.

President Biden will take a less hawkish stance on China than has been the case with President Trump and therefore Chinese stocks listed in the US should benefit.

In summary we believe, Investors should expect a Biden victory and have a general strategy where they are long sectors such as Financials, Industrials, REITs and Chinese stocks while being short the Oil and Gas sector. We would implement this net long investment strategy with some put options which would seek to protect capital if the value of the portfolio fell by more than 5%-8% but would otherwise look to profit from the likely rising market in a long biased portfolio. We can talk on this if people are invested.

The main risk to our view would be that the election is very close and/or the result is disputed or delayed. This could lead to uncertainty and unsettle the market.

Latest Update: Oct 23, 2020