Market Musings 10/10/20: Presidential Posturing

10th Oct '20 by Edmund Shing

12 comments 1152 reads

Presidential Posturing

Last week I was asked to take a look at the November 4 US Presidential Election, and its potential impact on the stock market.

I have to say, I am somewhat loathe to tackle this topic, as I find in general that stock market observers tend to place too much emphasis on the outcome of elections in the short-term, while the longer-term impact is generally less significant for the direction of financial assets.

But here goes...

Policy differences: Are they really all that great?

Classically, one would look first to the published manifestos of each candidate, to see where the policy differences lie between the various choices.

In the UK, for example, one has been typically faced with a choice between “tax and spend” and greater income redistribution (left-wing, Labour) on the one hand, and “smaller government, fiscally responsible, business-friendly” policies (right-wing, Conservative) on the other.

But while this may have been true during the 1970s through to the 1990s, it does not ring true today in the UK. After all, the current Conservative government seems very busy under Chancellor of the Exchequer Rishi Sunak spending money to support the economy, all the while racking up greater and greater national debt.

In the US, once again, the policy differences do not seem all that great when looking at fiscal policy. Both President Trump and Democratic candidate Joe Biden are offering expansionary fiscal policy stances; both are looking to spend a lot of money to kickstart US economic growth post the COVID shock.

Renewable energy: a winner under Biden

Yes, if anything Joe Biden is proposing to spend even more money than President Trump on huge investment in areas such as renewable energy generation and infrastructure. Part of the phenomenal performance in solar and wind energy stocks this year (see the ICLN iShares Global Clean Energy ETF below) can be put down to the expectation of huge US spending in this area in 2021.

Clean Energy ETF blows the doors off this year

Higher US corporate taxes under Biden

Joe Biden is proposing to pay for some of this extra fiscal spending via higher corporate taxes, partially reversing the huge corporate tax cut enacted in 2017 by Trump (taking effect in 2018), cutting the headline US corporate tax rate from 35% (back then,…

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jonno

10th Oct '20

Excellent synopsis Edmund, thank you. It strikes me that whichever way you look at it stocks related to renewable energy, infrastructure and energy saving will be in vogue, and not just in the USA.

Some UK listed stocks that come to mind are Volex (LON:VLX), Gresham House Energy Storage Fund (LON:GRID), Somero Enterprises Inc (LON:SOM) and Sig (LON:SHI) to name but a few. I hold Volex (LON:VLX) and Sig (LON:SHI) and am currently looking at Gresham House Energy Storage Fund (LON:GRID) and £SOM. There are no doubt other more obvious candidates that I have overlooked.

Best wishes

SCI20

I’ve held Volex for a number of years and am considering adding to my position but it’s trading at 52 week highs. Do you see this growth continuing?

Zipmanpeter

Another way of looking at this would be to say IF Biden wins (and especially if Democrats also win the Senate), corporate taxes for NON- favoured sectors (ie excl green infrastructure and healthcare) are likely to go up sharply as

i) (surely) the govt will need some income to repay COVID related expenditure whilst also accelerating long saving but short term capex heavy green and other infrastructure costs

ii) As per graphs above corporate tax real take is so low vs history and a new generation who grew up on the GFC and/or came from other countries are slowly taking power; they have a less positive view of the classic corporate world

iii) Generally US stocks seem quite expensive to me - something must prick the bubble at some point. Always difficult to spot what. Tech and Green stocks seem most bubbly but if they fall hard everything will fall hard

Net, I am relatively wary of stocks relying on the US market (incl some listed in UK) in next 12-18 months vs markets elsewhere. But as events of the last 5 years show, who knows!!

(Nice article BTW and hope this becomes a regular column)

Guzziman

Thank you Edmund, I do look out for your weekly, idle investor view.

For those who might be interested there is a sterling based iShares Global Clean Energy ETF (INRG)

https://www.stockopedia.com/et...

Edmund Shing

Hi jonno,

Interesting that Simon Thompson on the recent Investors Chronicle Alpha podcast mentioned Gresham House and GRID as an interesting income-producing play on solar and wind energy storage - despite a premium to NAV, GRID is still offering a 6%+ dividend yield I believe.

I remain a big fan of Volex (LON:VLX) personally, as I find the execution of the turnaround to have been impressive. It remains relatively good value even post the share price gains, and could now target the 252p level it traded at some years ago.

Edmund

Thanks Edmund.

Hi Edmund

Regarding Volex (LON:VLX) it has been an excellent turnaround and I hope that it will be replicated by Sig (LON:SHI), time will tell.

I have held Volex (LON:VLX) for sometime so am a little bias. I admit to taking some profits when the markets went into free fall during March and was very lucky to given the opportunity to buy back at a lower price. We all need a little luck.

As for Gresham House Energy Storage Fund (LON:GRID) I cannot claim originality, this idea was indeed borrowed from Simon Thompson but certainly worth investigating, however the sizeable premium to NAV is somewhat off putting, but compensated for perhaps by the 6% yield.

Once again thank you for an excellent article.

Harry Hindsight

"the wind seems coming round astern" - maybe not in Dubai.

Investing Easy

Agreed, Volex is my top holding at 10%, management really seem to know they're stuff

Easy1234

if biden win election pound will drop dramatically which some export orinted company on the other hand import will be more expensive for uk

William K

11th Oct '20

Many thanks for covering the US election Edmund. Superb write-up as always. It's reassuring for investors in the US markets that both Biden and Trump will support the economy. Your observations on the implications an increase in corporation tax are helpful. Green Energy is a hot topic right now (by the way, there's a great article on Fool.com about investing in Renewable Energy) and it is encouraging that Biden will be inclined to deliver substantial tax incentives to develop it further. The clean energy ETF $ICLN, which you mention, has strongly outperformed the NASDAQ 100 and will probably continue to do so over the next 5 years. (As Guzziman has pointed out there is an equivalent for UK investors in the form of £INRG.)

Michael Tee

Hi Edmund,

Enjoyed reading your piece.

I agree that whoever wins, still needs to follow a similar path of monetry and fiscal stimulus which should be positive for stockmarkets

I, however, think Trump's supporters adore him and his dislike of the establishment. He will also get at least 80% of the 60 million evangelical vote. Biden is not the best opposition. I think Trump will win.

Michael

Market Musings 10/10/20: Presidential Posturing

Presidential Posturing

Policy differences: Are they really all that great?

Renewable energy: a winner under Biden

Higher US corporate taxes under Biden

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Edmund Shing

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