Sometimes, it’s nice to pretend that your country’s economy isn’t wedded to what else is happening in the world. For all the talk of de-globalisation, however, it’s still pretty evident that global economic growth is driven by a few outsized factors, including the level of investment in Chinese real estate, the German current account surplus and US fiscal policy. To name but a few.
Speaking of which, you might have heard there’s a US election in just over a fortnight. And, setting aside who you may want to win, what’s clear is that both Donnie from Queens and Sleepy Joe will offer different approaches to fiscal policy. Donnie promises more of the same, with low taxes matched by lower government spending, while Joe offers the promise of a several trillion fiscal package on green energy and infrastructure, and higher corporate taxes.
Which might beg the question for our European readers, what will be the effects on our precious equity holdings?
Well, thankfully UBS has a note out this morning on precisely this issue. The Swiss bank’s findings in short: Biden is your man.
From the analysts:
According to work by our US Equity Strategist, Keith Parker, European equities have a positive sensitivity to a Biden win, as measured by the change in Presidential election odds. Indeed, Europe has a higher positive sensitivity than APAC, Emerging markets or the S&P 500 (Figure 7).
This may be in part because of the potential for a more “multilateral” foreign policy under a Biden administration. Donald Trump has levied trade tariffs on European goods and discussed imposing tariffs on European Autos.
And here’s Figure 7:
So which stocks should you be looking at? Instinctively in FT Alphaville’s mind — a Biden sweep is really a reflation trade. The logic goes like this: moar spending, combined with tax reform aimed at those with the lower marginal propensity to consume, leads to a higher proportion of national income accruing to those with a higher marginal propensity to consume, pulling prices up. This should be good for cyclicals, consumer goods companies and any business whose fortunes are explicitly tied to interest rates.
On the flip side, it should be bad for discount retailers, luxury good companies and high-end real estate businesses. And perhaps, dare we suggest it, priced-to-perfection high-growth businesses whose growth may not look so rare, relatively, in a reflationary world.
(This is a very loose framework, so do please feel free to pick holes in it.)
As you can see below, UBS has largely followed this theme in the 15 companies that it thinks are positioned to do well from a Biden win. See if you can spot where the bank jars with our thesis, however:
Thoughts welcome below.