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Following two disorderly presidential debates, and a chaotic run-up in the midst of a global pandemic, the presidential elections will take place in less than a week, on Tuesday, November 3. Both Joe Biden and Donald Trump have openly trumpeted their widely differing views on the potential solutions to 2020’s many challenges, with potentially majorly contrasting effects on the US and its future growth. Let’s have a closer look at the main policies of both presidential candidates, their impact on the US’ sustainability, economic growth and equity markets.
SUSTAINABILITY IN THE US: AN INCONSISTENT APPROACH
Sustainability seems to have taken Europe by storm in recent years. On the other side of the Atlantic, things are a bit different. First, we need to take into account the cultural differences between both regions that are directly impacting the development of this trend. US as a structurally liberal and deregulated country, copes less well with a strong regulated sustainability implementation across sectors and investments.
Regarding sustainable investments, the US government seems to have taken a more cautious approach than in Europe. In fact, under Trump’s presidency, we have witnessed a general push against sustainable investments, as the American President has always been in denial of climate change which he proved it when taking his country out of the Paris climate accord. The Department of Labour has tried to limit the inclusion of ESG funds in pension funds. It wants to emphasise financial interests as a first priority, and reduce the influence of any extraneous factors that might harm a funds’ profitability. A questionable argument, as ESG funds have generally been shown to outperform their peers (especially during the COVID crisis). The Department of Labour’s critical approach could end up backfiring, as over 60% of Americans currently agree that companies should include sustainability criteria.
On the fiscal side, Trump’s corporate tax cut was supposed to promote the economy, and benefit employment and workers’ conditions as a result. In the short term, this could have been a positive and strong, sustainable move, improving working conditions and encouraging corporate governance. Unfortunately, the savings from the tax break failed to trickle down. The deregulation he has carried on has helped some industries in the short term, but it has also been somehow electable and shorsighted, less effective in the longer term. After a tax cut, the government has to find another income stream, which proves his political agenda less balanced as it has been presented.
Trumps’ trade war against China was also supposed to benefit the American economy, as the president wanted to level the playing field. This too, ended up being more costly than initially anticipated (amounting to roughly 0.5% of the US GDP). Farmers, in particular, suffered because of China’s retaliatory tariffs on US agricultural products. In the end, the US was left with an even larger overall trade deficit
Trump has enabled the continued spread of his reactionary beliefs by appointing three conservative Supreme Court Justices. Very recently, Trump has successfully been able to appoint Amy Coney Barrett as the successor of Ruth Bader Ginsburg, right before the November elections. Trump also presided over the appointment of 200 judges, championing a strong, conservative presence in the American judicial system for years to come.
It is important to note that ESG and sustainability have never been key components of Trump’s campaign. Instead, his agenda mainly focuses on growing the US economy and creating jobs; Two notions, which, according to him, are wholly incompatible with the concept of sustainability. In contrast, Obama’s presidency had a much greater emphasis on sustainability, heavily prioritising the reduction of carbon emissions. Biden plans on taking a similar approach.
Biden has a clear election plan. The latter seeks to introduce his take on the EU’s green deal and revolutionise the US’ approach to sustainability and the environment. The general idea is clear: he wants to establish a modern, sustainable infrastructure and an equitable, clean energy future. In fact, he wants to eventually completely phase out America’s reliance on fossil fuels by 2050. For example, Biden has previously stated that he wants to replace/re-equip American school busses (all 500.000 of them) to make them carbon-free. The finer points of his big plan, however, are still relatively vague. Biden spent little time elaborating on the practicalities or actual feasibility of this project. And these practicalities come with a price tag. The campaign estimates that a successful sustainable transition would cost roughly USD 2 trillion, roughly 12% of US budget over the next four years.
US EQUITIES: THE OUTCOME OF THE ELECTION AND THE POWER OF THE CONGRESS
Clearly, Biden and Trump’s respective approaches to sustainability, and the economy as a whole, are significantly different. However, the presidential elections only show one part of the picture. Congress, too, plays a major role.
If Biden becomes the next POTUS, and congress has a democratic majority, the first thing we will see is probably a sell-off. Markets might take a nosedive in the short term due to possible corporate tax increases. Certain sectors, such as pharma or big tech, might face additional regulation, too. Biden’s approach might prove to be more successful as time goes by. His sustainable transition would boost renewable sectors, and hopefully create new markets and jobs. However, if congressional majority does not align with the president, the situation becomes far murkier, both in the short- and long-run. Without congressional support, Biden would be significantly constrained, and unable to enact swooping changes.
Trump’s actions would be limited too, if he gets re-elected, but has to deal with a democratic majority in congress. Still, markets would probably react positively in the short term thanks to less uncertainty. Trump’s tendency to deregulate markets will embolden banks and energy. But some stocks that are exposed to China and big exporters might suffer, since it is very likely that Trump continues his trade war. The impact will be less tangible in the short term, since markets got used to this scenario. If Trumps wins and the congress has a republican majority, that would be very positive for markets thanks to the deregulation, but not that positive in the long term. However, companies may continue pushing for sustainability if it makes sense and the arguments in favour are still there, as for energy sector example: the biggest US utility is the one having the most renewables which not only will lead to higher profitability but also constitute the easier path to sustainability.
Finally, the results of the elections could end up being contested as well. This would be the worst possible outcome, as the uncertainty and conflict could have a significantly negative impact on markets with a big sell-off.
Because of these widely varying outcomes, and their potential financial implications, investors have been rather anxious lately. Although we do not want to discount the short-term significance of US elections, they generally only cause comparatively brief disruptions in the markets, and are of little consequence in the long run. To limit the impact of these disruptions, as long term investors we favour a diversified portfolio that focuses on high-quality companies. We particularly like dividend-yielding firms. Companies, with a sound dividend growing policy, should be able to maintain steady returns, even in turbulent markets. Through dividends, companies can signal their health, value and quality. Regardless of company or sector, one should always evaluate whether a firm’s cash flow is invested correctly, be it as an investment in the company’s growth, or as a dividend pay-out.