Investment & Pensions Europe | US Equities: Implications of the US election

By July 19, 2016In The News

Joseph Mariathasan looks at what investors might expect from the two presidential hopefuls

At a glance
• The populist nature of the presidential election campaign is worrying many asset managers.
• Candidates may not live up to their sometimes extreme rhetoric in the event of being elected.
• Healthcare could be significantly affected by either a Clinton or a Trump presidency.
• Trump is more supportive of traditional energy sources and fracking while Clinton leans strongly towards renewables.

Many fund managers are reacting with concern at the rise of populism in the US presidential elections. Matthew Benkendorf, the CIO of Vontobel Asset Management in New York, expresses a common view. “It is scary in the US. An example of the anger of the disenfranchised,” he says.

The presidential contenders do seem to be playing to the crowds. Donald Trump, the Republican candidate, is particularly prone to this approach.

Many argue that widening inequality in the US has driven the rise of populism. “I think that there are some real things happening and a lot of posturing,” says Connor Browne, a portfolio manager at Thornburg Investment Management. “The average income has hardly grown at all for the median household for many years, whilst the rich seem to be getting a lot richer. That has shown itself in the candidacies of both [Democratic contender] Bernie Sanders and Donald Trump, who are very different, yet who are both playing to this disappointment by so many Americans at how they feel their country is letting them down”.

Browne argues that the reaction of the presidential candidates to that sentiment looks as though it is going to be very significant. “It seems like it is going to be important in politics. It is also probably going to be important in business and in regulation, producing both winners and losers in the corporate sector,” he says.

Donald Trump has been taking on extreme positions with regard to free trade and in specific sectors such as healthcare and energy. How much of the rhetoric would be translated into policy in the event of a Trump presidency is anyone’s guess.

But the market might well be mispricing the probability of a Trump victory. Trump’s populism may garner the votes of the disenfranchised but the extreme positions being bandied about are likely to be toned down dramatically by any seasoned set of advisers.

As Browne points out, Hillary Clinton is also representing herself as much further to the left than she would have had to if Bernie Sanders had not had such a successful run. “She is a more moderate centrist candidate than she is letting on at the moment,” Browne says.

Beckendorf agrees. “In terms of the market, Hillary is quite moderate, she had to run a very left campaign to get there as she is running against a left opponent. If you see where her history is, particularly with her husband, she will tack towards the centre, which is probably the best thing, clearly, let alone when confronting such a right wing person as Trump,” he says.

As more and more Republican standard bearers fall in line behind Trump, many Europeans look on with a mixture of bemusement and horror. Yet, clearly all is not well with the Republicans. “The Republican establishment is freaking out because they face the risk that Trump is such a disaster that he costs the Republicans the House and the Senate. That’s the problem right now,” says Benkendorf.

He goes on to argue that the Republican establishment spent eight years waiting to get a chance at the presidency again, and it does not have a viable candidate this election. “There are enough Senate swing seats up this year, that having Trump on the ticket means that there may be a low or unenthusiastic Republican turnout, so those seats may be lost to the Democrats. Over the past eight years, the Republicans have been controlling Congress. But there’s a fair chance they are going to lose a number of seats in the House as well.” If, as seems more likely, Clinton wins and there is a Democratic House and Senate, what would the implications be for investors in US equities?

While all the candidates have indulged in protectionist rhetoric, it is a Trump presidency that is likely to be the most aggressive. “I don’t think that a less free-trade push is what Hillary [Clinton] will be putting her chips on. It is healthcare, with issues on drug pricing and how to fix Obamacare [the affordable health insurance programme] that she will focus on. There are things about Obamacare that are breaking down right now that will need to be addressed,” says Browne.

Yet, argues Trey Parker, a partner at Highland Capital Management, an asset manager based in Dallas, Texas, Obamacare is not going to go away with either candidate, although there may be more significant changes under Trump. The focus on healthcare will certainly produce both winners and losers. As Parker says, to see decent growth in the economy, there has to be a component that is experiencing productivity improvements. “If you had asked me one-and-a-half or two years ago which area of the US economy is most ripe for productivity improvements, I would have said after the financial crisis it was energy but now it’s healthcare.”

The healthcare sector is likely to be concerned, says Benkendorf. “The president is there for posturing but there is not a whole lot the president can do when it comes to healthcare and drug pricing. It has to be done legislatively in the US. If you have a swing in Congress, and that is what the market is going to be paying very close attention to, it is going to be very tempting for Hillary to have complete legislative control to do something aggressive, on pricing or the like. That is the risk to the market in the particular space like healthcare.”

Drug companies, in particular, will be vulnerable even with Trump, who also called for the Medicare health insurance programme for the elderly to be allowed to negotiate drug prices directly with pharmaceutical companies. Not surprisingly, fund managers such as The Boston Company have reacted accordingly. “One area we have gotten more cautious on, regardless of which candidate is successful, is healthcare. We are sensing there are lot of pricing pressures in the US market in the healthcare system. As a result, we have collectively pulled back to an underweighting in the healthcare area and in our US opportunities strategy, we have adopted a half-weight to the healthcare sector,” says portfolio strategist Michael Arends.

Taking the healthcare industry more broadly, while pharmaceuticals will be most affected within healthcare, other areas such as insurance are rather resilient, argues Benkendorf: “We feel insurance is not so much a pricing story. It is a protected industry, with technological barriers and regulatory barriers. Moreover, the movement already under Obamacare is for government outsourcing to the private sector. They want the private sector insurance companies to be more involved in running Medicare and the Medicaid [healthcare programme for the poor] in the US.”

The other sector that appears to be most likely to be impacted by the choice of candidates is energy. “Hillary has an antipathy towards fossil fuels and is keen on renewables, where she would be willing to have lots of subsidies, and sees natural gas as a path to renewables. Fracking may come under increased scrutiny under Clinton. But Trump is much more supportive of traditional energy sources, especially coal. Although, as a populist, the environment is also important to him,” says Parker.

Military spending is also likely to increase under Clinton compared with the level under Barack Obama but it would probably also be even higher under a Trump administration.

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