A victory of Joe Biden in the US presidential election will bring an end to the dominance Wall Street growth stocks in favour of cheaper cyclical stocks, according to UBS AM.
Tomorrow, 3 November, the American people will decide on their new president. According to UBS AM, the chance of victory for the democratic candidate Joe Biden is 75%. The Swiss asset manager estimates that the Democrats also have a 55% chance of getting a majority in both houses of Congress. This «blue wave» base case scenario is the best outcome for stock markets, according to UBS AM.
‘We are optimistic about global stock markets, including US stocks,› says equity strategist Benjamin Suess in an interview with Investment Officer. Suess is not too worried about Biden increasing the corporate tax rate from 21% to 28%. ‘This will reduce the growth in earnings per share of S&P 500 companies by approximately 7%. But even then we expect a strong increase in profits of around 20% over the next twelve months. This will support Wall Street share prices.›
In addition, Suess adds, a blue wave scenario will make it easier for the Democrats to push through their stimulus plan of roughly $2,000 billion. ‘That is 10% of GDP. It will boost the US economy and business profits. In addition, Biden wants to invest another $2,000 billion in infrastructure and clean energy.›
Small caps benefit
According to Suess, the huge investment plans will mainly benefit industrials and basic materials stocks. In addition, Biden’s tax plans will also provide for an increase in tax on foreign income. ‘This will hit these sectors less hard than technology, communications and consumer-oriented stocks.›
Furthermore, Suess believes that utilities and especially semiconductor companies will benefit from investments in fibre optics and a 5G network, announced by the Democratic candidate. ‘The chip sector has done well on the stock market, but has lagged behind software and other hardware companies. A catch-up is to be expected, also because semiconductor manufacturers will benefit from an upturn in economic growth.›
According to UBS AM, a blue wave would be good for cyclical sectors that are lagging behind anyway. ‘The huge stimulus packages will lead to a rise in interest rates, which will put pressure on technology and other expensive growth stocks,’ says Suess. He prefers US small caps to larger companies. ‘Small caps tend to be more sensitive to the economy and therefore benefit more from stimulus packages. They also suffer less from tax plans because of their focus on the domestic market. What’s more, the monopoly positions of large US tech companies are coming under increasing attack. Together with the high valuations, this will lead to a rotation of tech to other parts of the market, including small caps.›
What if Trump wins?
UBS AM expects the dollar to weaken in a blue wave. Under Biden, global economic growth picks up and trade tensions decrease. At the same time, the budget deficit increases. This makes the dollar less attractive. According to Suess, a Biden win is also likely to end the outperformance of US equities. ‘Trade policy will become more predictable, which is good for the investment climate and world trade. International equity markets will benefit most from this, as they are home to a relatively large number of cyclical companies. Wall Street, on the other hand, has greater exposure to technology and communications companies which are less dependent on the business cycle.’
UBS AM is therefore positive about equity markets in the eurozone, Japan, China and other emerging markets, and neutral for the US. ‘If Biden wins the elections, but does not get the majority in the Senate, that’s not a major obstacle. Stock markets may react slightly negatively, as the stimulus package may then be smaller. Nevertheless, we believe that cyclical equities will outperform growth stocks in this scenario as well, partly due to declining trading tensions.›
If Donald Trump is re-elected against expectations, we will get more of the same, according to Suess. This is especially positive for the large tech stocks, because there will then be a smaller stimulus package. ‘In a second term Trump’s trade policy will be even more protectionist and less predictable. In order to bring more jobs back to the US, he could also attack the European Union and Japan, in addition to China. The dollar will strengthen and the US stock market will continue to outperform global equities.› UBS AM gives Trump a chance of only 25% to win the elections.