2024 US Presidential Election Insights from Mirova
October 22, 2024
-
10 min
Major policy differences between the two presidential candidates
As with the 2016 and 2020 elections, voters are presented with divergent policy platforms. The key policy differences, and those we expect to have broad capital market implications, are on trade and tax policies, which have been a focus of the two campaigns.
With Trump, higher tariffs are almost certain, an extension of reduced individual tax rates is also likely (Tax Cuts and Jobs Act), and lower corporate tax rates are possible. With Harris, tariff policy is likely to be far more selective, while both corporate and capital gains tax rates could rise, and personal income tax cuts would likely focus on the middle class. The candidates differ in other areas, notably on climate and energy (including the Inflation Reduction Act (IRA) and environmental regulation), North Atlantic Treaty Organization (NATO), immigration, and social care.
However, entrenched divisions between the two parties make bipartisan cooperation look increasingly unlikely. Thus, major policy changes will only be possible if one of the two parties manages to win the White House as well as both chambers of Congress.
We believe overall that Trump winning the presidency with a republican sweep would likely initially be a slight positive for US equities (tax cuts) and a clear negative for non-US stocks selling into the US and US importers. Small domestics would outperform in our view. Cyclicals would likely struggle, given the pressures on global trade due to a Trump trade war. Trump with a divided Congress is, we believe, neutral for US equity markets and negative for non-US, as tariffs end up being the key policy agenda.
In contrast, we believe that a Harris victory with a democratic sweep would be initially a slight negative for US equities (tax risk). Large market cap stocks and cyclicals would outperform. Trump’s Trade War losers (non-US stocks/ importers), which have thus far not reacted to Harris’ improved polling, would see a relief rally while US corporate taxpayers would underperform further. Harris winning with a divided Congress, however, is likely to be broadly neutral for most assets.
A Harris victory would also favor certain sectors such as renewable energy and we’d expect an initial negative reaction in traditional energy (fossil fuels) stocks, bearish dollar stocks, consumer stocks benefiting from the child tax credit and measures supporting consumption by working- and middle-class households and would be negative in relative terms for banks (more regulation) and stocks with high share buybacks or low taxes. The opposite would be true in the event of a Trump victory.
In terms of interest rates, if one of the parties wins a majority in both houses of Congress, this will leave the new President and his or her administration with plenty of room for maneuver when it comes to new fiscal stimulus, the priorities of which will differ depending on whether the Democrats or the Republicans have a majority. Their spending could boost inflation and convince the Fed to maintain its conservative stance. We would expect higher inflation and deficits to push the fair value of US yields upward. We think, however, a republican sweep would be the most impactful.
Conversely, if Congress remains divided, the possible tax cuts sought by the Republicans, or the social spending planned by the Democrats, will be much more limited or even blocked. This could encourage the Fed to cut rates again.
Implications For The Global Sustainable Equity Strategy
By the sustainable equities team
Changes in the political landscape will always happen and, while they can influence the economic landscape and market reactions in the short term, we believe secular trends and themes we look at will still hold in the long run. Our investment views are shaped for our clients’ benefits over the long term. As always, we continue to focus on individual company fundamentals and long-term business opportunities and assess the potential impact of changes in the political and economic landscape. While positioning could change marginally at any time based on our bottom-up analysis of companies, we do not expect to shift the strategy’s positioning tactically or materially in response to an election outcome as we continue to employ a long-term investment approach focused on long-term economic drivers.
We focus on the broad potential implications for our Global Sustainable Equity strategy based on our positioning relative to the broad market benchmark (MSCI World). We expect short-term impact on relative performance based on the market’s initial reaction, which may be similar to what we saw in 2016 or 2020, depending on the outcome of the election. Longer term, it is difficult to forecast actual policy and policy changes and the impacts to the strategy, particularly in the context of a shifting geopolitical landscape more broadly. As always, we will incorporate new material information in our analysis of companies as it becomes visible.
Regarding our sector positioning, two of the largest implications for relative performance are likely to come from our positioning on energy (lack of exposure to traditional energy and overweight to renewable energy) and financials (lack of exposure to US large, diversified banks). On energy specifically, we expect a Harris win to have an initial positive effect given our energy positioning, while a Trump win would likely create an initial negative impact on relative performance. However, while Trump’s expected support for fossil fuels and tighter guidance on climate-related initiatives may support traditional energy and weaken the economics for some clean energy projects in the short term, we know that despite Trump's efforts to unequivocally support the fossil fuel industry during his past presidency, we continued to see investment in low carbon solutions and commitment from U.S. corporates and state and local governments, among others, to climate objectives. Additionally, while certain aspects of the IRA may be at risk (e.g., the personal tax credit for electric vehicle purchases), we believe it is unlikely for the IRA to be repealed in its entirety, if at all, if Trump is elected (and would require a republican sweep). According to Morgan Stanley, approximately 90% of IRA investment dollars have been deployed in Republican states, meaning Republicans would need to destroy their constituents’ jobs if they moved to overturn the IRA, and a major focus of Trump’s economic policy is bringing manufacturing jobs home, which the IRA has done.
For traditional energy stocks, in the event of a Trump win, the initial market reaction may be positive for traditional energy stocks just as we saw in 2016, with the S&P 500 Energy sector index up nearly 9% in USD in November 2016. All else equal, however, increased production and supply of oil and gas will lead to lower energy prices, a positive overall for consumers, but a negative for traditional energy sector investors as energy stock performance is often highly correlated to the direction of oil prices. During Trump’s presidency, the energy sector went on to be the worst performing sector over the 2017-2019 period and the only sector in negative territory over that period (excluded 2020 due to the Covid-19 pandemic, during which the energy sector was down nearly 35%)1. While a Harris win may provide a somewhat more supportive environment and increased visibility for renewable energy companies and investors, a divided Congress will likely inhibit any major policy change from the current administration and regulatory uncertainty may persist in the near term. We maintain our long-term conviction in the energy transition, but we must be very selective in individual stock picking in the space, focusing on high-quality names.
While our strongest sector overweight is in healthcare, we expect the initial market reaction may be relatively neutral given the topics of healthcare reform and drug pricing have been less in focus compared to other priorities. However, while both parties cite commitment to affordable healthcare, Harris has focused more on drug pricing in her campaign comments than Trump and may be seen as taking a tougher stance against pharmaceutical companies.
Non-US company stocks are likely to underperform their US counterparts in the event of a Trump win, which may weigh on relative performance initially given our underweight to the US, which comprises 72% of the MSCI World as of the end of September. However, we do not have exposure to areas that we believe are likely to be hit hardest over time under a Trump win (e.g., German Original Equipment Manufacturers (OEMs)). On the other hand, our strategy has no exposure to mainland China, and we have reduced overall exposure to China after lowering our overall outlook for China and exiting two names with significant revenue exposure to China in January 2024.
Overall, while we may expect an initial market reaction to impact short-term relative performance, we believe our barbell positioning, combined with a focus on high-quality companies and bottom-up fundamentals supports the strategy’s performance in a variety of market environments.
Investment opportunities and risks under each possible administration
A Trump administration would have a widely unfavourable impact on:
- European export companies, especially German OEMs would be hit in our view;
- European governments: we have calculated that European states that are part of NATO would have to dedicate a combined €75bn p.a. in defense budget at the very least; this could prompt austerity measures to fund the above-mentioned budgets, and end up increasing the possibility of recession for the euro zone.2
A Trump administration could have more supportive impact on any companies exposed to the US discretionary consumption levels.
- Opportunities: Small Cap US, ex Auto OEMs
- Risks: inflation resurfacing, albeit capped; German OEMs suffering further.
A Harris administration would have more favourable impact on European corporates but will however likely translate into more tense relationships with Russia, in turn adding weigh on consumer confidence in Europe. We also consider that higher corporate tax rates for US companies, as is planned in the Democrats’ platform, will not be a game changer per se, and that equity markets will likely rapidly factor it into their prices.
- Opportunities: US corporates; some European value corporates.
- Risks: geopolitical tensions being exacerbated
Market risks leading up to and following election day
It is common for economic policy and investor uncertainty to rise as an election approaches. This time, the uncertainty could last beyond that. If the election result is close in one or more states, we may expect there to be challenges and appeals. In 2020, Donald Trump did not concede defeat and accusations of fraud are commonplace in his speeches. Uncertainty affects economic behaviour. In Q3 2024, in its CFO survey, the Atlanta Fed found that a third of the companies surveyed said they were reducing or postponing their investment plans because of this election uncertainty. Depending on the outcome, companies will not face the same taxes and trade uncertainty could re-emerge stronger than before. In a very tight presidential race, uncertainty in down ballot races, and the possibility of allegations of fraud, investor uncertainty will remain high going into the election, possibly causing increased market volatility leading up to and following the election.
In any scenario, we expect the market to experience volatility. As long-term, active investors, we may take the opportunity and leverage short-term divergences in price and long-term value to reinforce or add high-conviction names.
Key strategy themes expected to play out over the next 1-3 years regardless of the election outcome
Regardless of the outcome of the election, there are a few key long-term themes we expect to remain in focus and continue to develop over the medium term. For one, we continue to see increasing demand for generative AI applications and automation, and, alongside this, increasing energy demand and need for improved energy infrastructure. We believe renewable energy and storage will have to play a role in meeting the expected energy needs in the future. We also continue to focus on the long-term opportunity in GLP-1s3 and other healthcare innovations in some of the leading causes of death, including oncology, cardiovascular disease and neurological diseases. Lastly, we expect certain areas of environmental regulation to continue to develop; specifically, we expect a continued focus by regulators on forever chemicals or Per- and Polyfluoroalkyl Substances (PFAS) in our water supply, which will create opportunities for companies involved in water quality and safety.
