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US Elections 2020: The climate holds its breath

09/10/2020

Recent elections, including the 2016 US Presidential election have taught us the risks of being too confident, whether in taking poll data at face value, or in anticipating the subsequent reaction by market participants. How should investors think about the upcoming US election?

1. The 2016 US Presidential election offers a good reminder of how difficult it can be to predict political outcomes. Hillary Clinton maintained a lead in the opinion polls over Donald Trump throughout 2016, and even won more votes overall than the eventual victor, but Mr Trump won a sufficient number of tight contests in swing states to secure the White House.

Figure 1: US Election polls over year leading up to vote, 2016 and 2020

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I think it is important to acknowledge that any poll may have limited value in indicating which candidate will become the next US President. Human psychology finds this type of uncertainty difficult to cope with and might sometimes lead us to become either overly confident or overly cautious. Difficulties in identifying the appropriate statistical probabilities of each potential outcome and how they are changing, can sometimes stimulate shifts in asset prices and create market volatility.

Some additional concern for the current US elections comes from the rhetoric being used by President Trump regarding his acceptance or otherwise of an election result, not in his favour. If the result is unclear but still favours his opponent, Former Vice-President Biden, it may eventually fall to the US Supreme Court to decide who the next President will be, a process which may not be swift. Recall the contentious result in one state alone, Florida, that stalled the final result in 2000 between George. W. Bush and Al Gore. The Supreme Court now has a substantial conservative majority, more likely to favour the Republican candidate, with three out of the current eight members having been appointed by President Trump. Involving the Supreme Court might not only lead to a prolonged period of uncertainty, but potentially also to civil disobedience and unrest.

However, the Presidency is not the only thing at stake. Both Houses of Congress also face an election, with the entire House of Representatives, and a third of the Senate being up for grabs. The range of potential mixes of parties in power in the US in 2021 become increasingly complex and associating a probability to what that may mean for markets becomes even more difficult.

2. Based on what we know about each candidates' policy proposals, what might the election of either of them mean for the economy?

In short, whatever the outcome, I don’t think we will be seeing a significant shift in direction of the US economy yet.

Some of Former Vice-President Biden’s manifesto ideas may be considered less market friendly than President Trump’s, such as the proposal to increase the corporation tax rate from 21% to 28%. His proposals on personal income taxes are also focused on higher earners, those earning more than $400,000 a year, rather than the broader electorate. The Tax Policy Center estimates that the top 1% of earners would bear three-quarters of the increased tax burden. Contrastingly, President Trump’s tax proposals are not to increase taxes but include taking measures to would boost take-home pay and reduce the capital gains tax rate from 20% to 15%.

Further, the Biden-Harris campaign pledges to focus on developing and upgrading the country’s infrastructure as part of an extensive investment plan to spend US$2 trillion to rebuild infrastructure and boost clean energy. President Trump, meanwhile, has suggested allocating nearly $1 trillion of spending to a wide variety of infrastructure projects across the nation. Senate Republicans appear concerned about the effect that may have on the federal deficit, however.

Despite the evident differences between the Presidential protagonists, we do not believe the proposals, if enacted, are significant enough to cause a meaningful shift away from a capital-centric economy to one centred on labour. Should the Democrats win the election there may be a modest shift towards a more social economy, but it is unlikely to provoke a full-blown change in corporate America.

3. During the recent debate between the candidates one topic was notably absent: climate change. Where do you think the two candidates stand on this?

This is certainly an area where the two candidates have completely opposite views and proposals. President Trump’s apparent denial of climate change and his approach to sustainability matters provide for a negative outlook for the climate and the US influence on it in future. He will most certainly lead the US to leave the Paris Agreement in November.

On the other hand, Mr Biden has grasped the sustainability agenda. I have mentioned earlier, his proposal to invest approximately $2 trillion in the next four years. This may not be as far-reaching as the Green Deal proposals of some other Democratic hopefuls such as Bernie Sanders, but it is certainly more progressive than any previous plan in the US. It is ambitious in our view, having the aim of setting the country on a path towards zero emissions by 2050. The plan focuses on infrastructure, renewable energy, auto industry and transportation. Most importantly, Biden’s plan is addressing the climate crisis while introducing the concept of environmental justice, by targeting job creation for the most vulnerable parts of the population.

It is important to note, however, that the President’s somewhat negative approach to sustainability has not prevented change from taking place in the US. In the last few years, as the costs of generating power from renewables have declined and its efficiency improved, there has been a notable increase in the amount of electricity the US generates from renewable sources. By 2021, non-hydro renewables generation is forecast to be more than double what it was as recently as 2014. Together with hydro power, renewables generation is expected to match the amounts generated from coal, and overtake that arising from nuclear power stations.

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