Day: 3 November 2020

Determining the impact from a change in administration has historically been hard to predict. Political positioning and external factors can have a profound impact on the policies that make it from the campaign trail to the bill-signing ceremony.

As such, we prefer to focus on the long-term implications of the different key priorities of each party and the related impact to valuations at the company level.

Generally, if President Donald Trump were to be re-elected, we don’t foresee many significant policy changes and expect the status quo. If former Vice President Joe Biden were elected, but the Senate remains in Republican hands, we think he would be able to implement some of the policies he has advocated, but the scope would be more limited, and any sweeping changes in healthcare law or the tax code would be muted. Finally, if there is a Democratic sweep across the presidency and Congress, then the Democrats would have wide latitude to implement the party’s priorities.

We’ll discuss the economic implications of three policy areas in which the winner could hold significant sway.

How Election Outcomes Could Affect International Relations

Under either a Trump or Biden administration, we expect that there will continue to be a significant amount of friction between the United States and China. Threats of a trade war or additional tariffs would be amplified under Trump, who has taken a publicly antagonistic stance toward negotiations.

We anticipate that the Biden administration would take a traditional, diplomatic approach to negotiating with China; yet even so, underneath the publicly made statements, we expect tensions between the two countries to continue as China looks to expand its global influence. For example, we may not see existing trade tariffs lifted immediately, but those tariffs may be used as a bargaining chip for negotiating with China.

The key priorities from either administration will be:

• To protect American technology and intellectual property.
• To open Chinese markets to U.S. companies.
• To limit China’s growing global influence and military expansion.

Trade negotiations with China will become increasingly more complex as other trends play out. For example, the coronavirus has increased concerns about the fragility of international supply chains. While the U.S. will look to open up Chinese markets, many corporations are considering revamping their supply chains. In order to lessen reliance on China, companies may shorten their supply chains by moving back to, or at least geographically closer to, the U.S. 

What the Election Could Mean for Tax Policy

It’s no secret: Democrats and Republicans differ greatly in their views of tax policies.

Under a Trump administration, we would expect a continuation of existing policy and the potential to either expand or extend additional tax cuts. However, any changes would be fairly modest as the House of Representatives is almost certain to remain under Democratic control.

Under a Biden administration and Democratic Senate, we expect that corporate tax rates would quickly be raised from 21% to 28%. This increase would have different effects on stock valuations depending on a company’s earnings composition.

For example, in the corporate sector, a company whose earnings are predominately generated domestically, that is modestly leveraged, and is already paying taxes at the current rate would see its enterprise valuation drop approximately 7% to 8%. The full impact of the increase in tax rates over the broad market would be more muted as corporations look to tax strategies to lower their effective tax rate.

Within the banking sector, we estimate that stock valuations would drop between 2% and 6%, with regional banks being hit the hardest and larger global banks at the lower end of the range. Although the stock prices for some banks might experience pressure if it appears that tax rates are headed higher, we think that from a sector perspective, the impact to financial services would be moderate.

Utilities earnings and valuations might be less sensitive to an increase in corporate tax rates. Regulators typically set customer rates based in part on utilities’ aftertax earnings. As such, utilities can raise customer rates to reflect higher corporate taxes.

Infrastructure and Possible Election Outcomes

Both candidates have advocated for greater infrastructure spending. Considering that infrastructure spending has a high economic multiplier effect and leads to new jobs, which would be especially helpful during this time of high unemployment, it is more likely than not that a deal will get done no matter who wins the election.

Under a Trump administration, we expect that infrastructure spending would be concentrated on more traditional projects like highways, bridges, and mass transportation.

Companies that provide the raw materials and aggregates would benefit from new multiyear infrastructure spending programs.

Under a Biden administration, we expect that infrastructure spending would also include energy-efficiency and clean-energy projects. For example, funding could be granted to retrofit commercial properties to improve energy efficiency, transforming them into “green buildings.”

 

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Morningstar Disclaimers:

Since its original publication on Morningstar.com, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in.

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.

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solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

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When it comes to regulation, the contrast is clear: With a second term for the Trump administration, the rollback of regulatory restrictions would generally continue. A Biden administration would look to quash many of the deregulation efforts that have been made under Trump.

Plenty of industries would feel the impact of ramping up regulation or scaling back. But one industry the Biden-Harris campaign proposed rolling back restrictions on would create major momentum for a budding industry: cannabis.

Growing Cannabis After the Upcoming Election

Sen. Kamala Harris (D-Calif.) recently pledged to help decriminalize cannabis. If a Biden Administration is elected and this campaign promise becomes policy, motivation for further easing the federal prohibition could follow.

Loosening restrictions would help the cannabis industry mature. Banks and other ancillary services have stayed away from servicing cannabis companies owing to legal risk. These companies’ stocks are currently limited to trading on the over-the-counter market and Canadian exchanges. Decriminalization could prompt U.S. markets to allow these stocks to trade on U.S. national exchanges. This change would allow cannabis companies greater access to the capital markets for growth.

Now, many institutional investors are precluded from investing in over-the-counter stocks because they lack sufficient liquidity. But with this potential catalyst on the horizon, those same investors are beginning to do their homework, so that they will be ready to go when cannabis stocks move to an exchange.

The Future of Fracking and Electric Cars

Under a Biden administration, we expect many climate change policies will be implemented that would present headwinds to the U.S. oil industry. However, even after incorporating those changes into our supply and demand analysis, we continue to think the energy sector is undervalued.

 Among the policies that we expect from a Biden administration, there will likely be a reset that would include re-entering the Paris Agreement, reversing Trump-era policies, and halting permitting for drilling new wells on federal land.

While the federal government can stop the permitting needed to allow new drilling on federal land, it can’t ban fracking on private land, where most shale oil firms operate. If there’s a ban on permitting on federal land, we don’t expect a significant impact in our supply and demand analysis.

Congress could pass a new law to ban fracking, but we think that would be highly unlikely for two reasons. Biden has stated that he would not look to ban fracking outright. And banning all fracking would severely cut employment within the energy industry and among its suppliers as well as increase the cost of oil, which in turn would have a negative impact on the economy.

Vehicle fuel efficiency standards would likely be increased along with policies to build out charging station infrastructure nationwide. A Biden presidency could also provide financial incentives for the transition to electric vehicles. Our current forecast for the percentage of new U.S. vehicle sales that are electric or hybrid is 15% and 25% in 2025, respectively. Under a Biden administration and Democrat-controlled Senate, we would increase those percentages to 25% and 35%, respectively.

Yet, even in the Biden scenario, we forecast that U.S. gasoline demand would decline by only 3% by 2025 and by 9% in 2030 as compared with our base case. U.S. gasoline demand accounts for only a third of U.S. crude consumption, which equates to only a 1%-3% decrease in U.S. crude oil demand, globally, U.S. crude oil demand is only 20% of global demand.

The increase in electric and hybrid vehicles will also provide a boost to the lithium industry. We forecast that lithium demand will grow more than 6 times from around 300,000 metric tons in 2019 to roughly 1.9 million metric tons in 2030.

A Biden administration will need to be judicious as to how much and how rapidly to implement proposed changes. If they move too rapidly, the changes could quickly drive up fuel prices and hamper economic growth, as well as increase the amount of imported oil and increase the country’s reliance on foreign suppliers.

Renewable Energy Build-up

No matter who wins the election, renewable energy will continue to grow as a percentage of electricity production and will become the second-largest source of power generation in the U.S. by 2030, according to our forecasts.

As a percentage of power generation, coal has been declining over the past two decades and will continue to do so. There are no new coal plants being built in the U.S. currently, and hundreds have been retired or will be retired in the coming decade. We forecast that growth of renewable power will increase 8% annually based on renewable energy policies as dictated at the state level as the primary growth driver as opposed to federal regulation.

The Trump administration has largely stayed out of the way and has allowed the trend toward renewable power to play out. Biden’s energy platform calls for the U.S. to reach net zero emissions by 2050, but the majority of U.S. utilities has already made this pledge.

Among those utilities companies whose long-term outlook will be constrained by the trend toward renewable energy are those that are unregulated. In particular, those with a heavy reliance on legacy fossil fuel or nuclear power generation could face margin pressure as low-cost renewable energy increases its share of wholesale power markets.

What Investors Should Know

The implementation of the key priorities of the next administration will certainly have an impact on the valuation of firms that are directly affected. Until Election Day, investors should take into consideration the potential impact to the companies they invest in. While it may be prudent to evaluate making a few modest changes in your portfolio, we recommend focusing on your long-term investment goals

 

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Morningstar Disclaimers:

Since its original publication on Morningstar.com, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in.

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.

---

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or
solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your
investment return therefrom. Any decision to invest should always be based upon the details
contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta)
plc.