2021 M01 8
Two months on from the election, US politics is back at the forefront of the news agenda following defeats for both Republican senators in the runoffs for their respective seats in Georgia. The results are significant, as an evenly split Senate allows incoming Vice-President Kamala Harris to cast deciding tie-breaking votes when necessary. In effect, this removes the Republican majority in the upper chamber, which, combined with the Democrats’ majority in the House of Representatives, means President-elect Biden has a much greater chance of implementing his legislative agenda. This will have an impact not just politically, but for the broader financial markets, too. In this short piece, Sahil Mahtani, Strategist in Ninety One’s Investment Institute, and Deidre Cooper, Co-Portfolio Manager of Ninety One’s Global Environment Strategy, offer insight on what a Biden presidency combined with a Democratic Senate could mean for investors.
Democratic control of the Senate and the House makes it virtually certain that the Biden administration will seek to implement meaningful stimulus in 2021 with a strong sustainability agenda. In late 2021 or early 2022, when the economy is stronger, tax increases will likely be implemented to fund this spending. Stimulus is positive for US growth, and therefore inflows into US equities, and may lead to a substantial rise in developed market bond yields, with significant cross-asset implications.
Nevertheless, a Democratic clean sweep is likely to be negative for the US dollar in the first instance because it decreases the risk premia on emerging market (EM) assets that has built up as a result of volatile US foreign policy. In the medium-term, supportive stimulus policies in the US will also tend to push up global economic growth, which is supportive of EM currencies. Inflationary pressures should also support gold.
At a sector level, the Democratic policy of pushing for net-zero emissions by 2050 is likely to benefit clean-energy equipment and utilities businesses, while the fossil-fuel complex could be a loser, depending on what the Biden administration’s policy towards that industry ultimately is. ‘Big tech’ might lag the market due to the threat of increased regulation, while in healthcare, so often a key battleground, reform is possible in an attempt to lower costs. Democratic policy should favour the managed-care organisations, generic pharma companies and non-US pharma companies, with potential losers including domestic pharma businesses and healthcare services providers.
The US approach to environmental matters under Biden will be in marked contrast to his predecessor, with the US committing to hold a climate summit this year and seeking to re-join the Paris agreement. The climate plan Biden announced on the campaign trail last July reflected a pivot towards Bernie Sanders’/Elizabeth Warren’s primary plan, with a net-zero target by 2050, 100% zero-carbon electricity by 2035 and 4 million buildings to be made more energy efficient. Of course, campaign manifestos are not policy. Democrats already included a short extension to the wind and solar tax credits in the stimulus passed at the end of 2020. And with effective, albeit razor thin control of the Senate, it is likely that the Biden administration will implement further stimulus in 2021 with a strong decarbonisation agenda.
Chuck Schumer, as the new majority leader of the Senate, is likely to favour a progressive agenda, particularly as he may well face Alexandria Ocasio-Cortez as an opponent in his primary in 2022. Specifically, we would expect the tax credits for renewable energy (despite being highly imperfect tools to stimulate demand) to be further extended as part of that stimulus and, crucially, a separate tax credit for energy storage to be implemented. This is particularly important for the US wind industry, where the production tax credit sunsets earlier than the investment tax credit for solar, and the nature of the production tax credit makes it difficult to collocate storage with wind but much easier with solar.
A Democrat-appointed Federal Energy Regulatory Commission should also help, as will faster permitting for offshore wind farms which had been consistently delayed by the Trump administration. There also may be potential for federal renewable portfolio standards, which Obama tried to introduce. As a result, our 2022-25 wind-installation forecasts have close to 100% upside in a clean sweep versus the status quo ante. This implies significant upside for leading wind developers and companies in their supply chains, such as turbine-blade makers. Additional upside for solar is more muted, just because the growth outlook is so strong anyway. The targeted energy-efficiency upgrades to buildings, likely to be part of an infrastructure stimulus, would be a strong tailwind for companies that provide solutions for heating, cooling and powering buildings more sustainably.
We would also expect the 200,000-vehicle-per-automaker cap on the current US$7,500 incentive for electric vehicles to be removed and emissions standards for automotive OEMs to be tightened, meaning that our US electric-vehicle sales forecast also has close to 100% upside (to date, the US has been by far our lowest-growth electric-vehicle market); this would be a tailwind for the diverse companies in the electric-vehicle supply chain, from makers of battery components to suppliers of sensors, software and power semiconductors.