How a Trump or Biden win will affect shareholders
by Luke Housego
The US presidential debate on Wednesday morning will place the American election in sharp focus for investors. The contest for the White House, the 400 seats in the country's lower house and one-third of the Senate will determine the direction of US foreign policy and trade, stimulus spending, regulation and tax.
In what has already been one of the most unpredictable years for the sharemarket and earnings, the outcome of the ballot on November 3 will be a key driver of sharemarket volatility until the count is completed and the institutions of government fire up again on the other side.
The Trump campaign has opted to corral voters with a focus on notional statements rather than reform promises. The Biden platform has put forward plans that feature higher regulation, higher public spending and higher taxes.
The ballot will also have far-reaching ramifications for global trade, raising the stakes for equity markets. A Biden administration is widely expected to see a return to international co-operation despite campaigning on the prioritisation of the domestic economy and jobs.
"It's a big deal," said John Birkhold, partner at Origin Asset Management. "The key point for equity markets is discounting future cash flows, and future cash flows are a function of the after-tax return that companies achieve and the discount rates the market applies to those future cash flows."
The Sydney-based American portfolio manager cites the competing positions on corporate income tax. The Democrats have committed to lifting the company tax rate to 28 per cent, which would reverse half of the 14 per cent cut introduced by Trump in 2017.
"A Biden victory is going to... negatively impact the rate of profitability that companies are able to achieve, given his desire to raise corporate taxes," Birkhold says. "So this impacts the after-tax [return on investment] that companies achieve."
Estimates from UBS found that Trump's tax cuts would add an average of between 7 per cent and 9 per cent to earnings per share for the US S&P 500 index.
The changes will also hit a number of Australian companies, explains Randal Jenneke, portfolio manager and head of Australian equities for T Rowe Price.
"Any Australian company that generates a large chunk of their profit in the US is going to be hit by high corporate taxes," Jenneke says. "So definitely healthcare - if you think about most of the healthcare companies, 50 per cent-plus earnings come out of the US."
Among the examples are CSL, which generated 54 per cent of its revenue in the US last year, and Resmed, which has a higher concentration at 62 per cent of revenue.
While the income tax rate for corporates was 35 per cent before Trump cut the rate to 21 per cent, Resmed's effective tax rate was just 18.3 per cent for the year ended June 2017, the financial year before the corporate income tax rate was cut from 35 per cent to 21 per cent.
"A lot of companies were paying very low levels of tax anyway," says Insync Funds Management chief investment officer Monik Kotecha. "And so it really only benefited a narrow number of companies that were probably paying higher tax. I think the reality is it's going to be much more of a sentiment hit than an actual cash flow hit."
As for the short-term boost to profit margins, the longer-term risks associated with social discontent and widening inequality have been compounded by the reports this week that Trump largely avoided paying personal income tax in nearly three out of every four during the 18 years to 2017.
The Australian sharemarket's large exposure to the US through healthcare also leaves the sector exposed to reforms proposed by Democrats.
"The Democrats have a very different view on the future of healthcare," says Kotecha.
Although increased regulation from the Biden administration would see pricing reforms weigh on drug makers, expectations of increased public spending to lift access to medical services would support the earnings outlook for companies including Cochlear, Resmed and Fisher & Paykel Healthcare.
Beyond health policy, Birkhold says both contenders are expected to preside over higher government spending in a bid to revive an economy reeling from the pandemic.
And with a "blue wave" result that sees the Democrats secure the White House as well as the numbers to control the Senate considered possible, the possibility of testing the limits of unconventional monetary policy increases, Birkhold explains.
"And therefore government spending in my eyes is probably either more or a lot more, which would drive the notion that maybe precious metals or some other store of value might also be attractive," Birkhold says.
"So, for example, we do own a fair number of the Aussie gold miners."
Contested election risk
Biden leads in national polls by 50 per cent to 43 per cent, according to an aggregation of polling data by analytics provider RealClearPolitics, although his lead in swing states is less convincing
But with Biden not just a distant chance, Sage Capital portfolio manager Kelli Meagher says a major threat to the sharemarket is the possibility of Trump rejecting the result.
"There's going to be long period of volatility if there's a contested result," Meagher says, explaining that it is not only the risk of a disputed result that she is concerned about but also the potential for civil unrest.
Trump has regularly said that should he not win the election, it would be an illegitimate result, based on claims that postal votes had "rigged" the vote.
One theory is that his provocative suggestions are simply a tactic to keep the media narrative away from his handling of the pandemic.
If that is the case and he is prepared to ensure a smooth transfer of power, the risk will remain that his suggestible supporter base may respond to a Biden win with civil unrest, emboldened by the belief that public institutions cannot be trusted.
Luke Housego is a journalist for The Australian Financial Review based in the Brisbane office.
Equity Trustees Limited (“EQT”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.