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.
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:
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.
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.
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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