A New President is Elected, The Polarisation Remains

11.11.2020 12:03
Allan Eriksén, Strategist and Portfolio Manager, UB Asset Management

There has been a lot of excitement and drama on the market this year. The coronavirus has not yet been eliminated, and a second wave is currently ravaging Europe in particular. A significant advance regarding the efforts to develop a coronavirus vaccine was announced on Monday 9th November, when American pharmaceuticals firm Pfizer and BioNtech in Germany announced the results of the third phase of their vaccine study. The effectiveness of the vaccine is proving to be extraordinarily strong, up to 90%. An accelerated approval process for the introduction of the vaccine is now being applied for and the vaccine is expected to be available by the end of the year. With a widespread use of the vaccine, the coronavirus epidemic can be expected to subside, and life will gradually get back to normal.


In the United States, the Trump administration's indifferent attitude to the coronavirus eroded his support and weakened his chances of re-election. Before the elections, Trump’s Democratic Party challenger Joe Biden was already a clear front-end contender with an average lead of about 8 percent according to national polls. In the United States, however, the President is elected by the electorate, which is why some of the so-called swing states often play a key role in the actual outcome of the elections.


Just like four years ago, Trump again surprised the pollsters with his strong support. At the time of writing this, Biden appears to have won the election, but the final result is still technically open as some states are recounting votes because of very narrow margins. In addition, Trump has also questioned the results and is likely to try to influence the outcome through the courts.


The separation of powers in Congress affects economic policy


In the parallel Congressional elections, the outcome for the Senate is still not clear. Republicans, however, are likely to hold a majority in the Senate. Democratic hopes are pinned on a run-off election in Georgia on January 5th, where Democrats can theoretically win two more seats in the Senate, allowing them to level with Republicans (50/50). In this case, in a possible tie, the vote of Vice President-elect Kamala Harris would become decisive.


From an economic policy point of view, the separation of powers in Congress is clearly more important than who is the President. If the same party has a clear majority in both the House of Representatives and the Senate, the party will be able to push through its legislative agenda, especially if the President’s executive branch of government represents the same party.


With Biden's assumed popularity, it seemed likely that the Democrats would win not only the House of Representatives but also the Senate when political power for at least the next two years would have been firmly in the hands of Democrats.


In his campaign, President-elect Biden has proposed, among other things, huge infrastructure projects and investments in renewable energy. These stimulus measures, which strongly support economic growth, would lead, on the one hand, to an increase in government debt, a possible increase in interest rates and tax increases. However, the democratic dominance of both chambers of Congress (House of Representatives and Senate) is also a prerequisite for delivering on Biden’s election promises.


On the whole, the Democrats' victory was thinner than expected. A clear majority is unlikely to be won in the Senate. The majority seems to have narrowed in the House of Representatives, and Biden's victory appears to be elusive. The American people did not totally abandon Trump, and some may even argue that without the coronavirus, Trump might have won.


U.S. domestic politics is unlikely to change radically. Democratic progressives will probably not be able to push through tax increases or renewable energy investments if a Republican majority in the Senate opposes them. On the infrastructure side, it is possible to see some compromises on a smaller scale.


However, if the Democrats were to win not only the Presidency but also the Senate, the situation would be a triple victory in line with the initial election projections, and Democrats would have the power to implement, among other things, their promised stimulus policy.


In foreign policy, the change of president will increase policy coherence and will probably reinvigorate poorly managed relationships with the international community. However, there is a broad consensus in the United States on the need for tough measures towards China, so little significant change of direction is expected with regard to China policy. Instead, the EU may breathe a sigh of relief after President Trump's unpredictable tariffs and NATO threats becoming a thing of the past in the Biden presidency.


The recent news on vaccine advances had a positive impact on economic growth forecasts. The need for politically difficult stimulus measures will be reduced if vaccines are expected to be widely available by the end of 2021. The very loose monetary policy signalled by central banks can continue and will be easier to implement if the economy starts to recover on its own in 2021. Real interest rates will remain low and support the stock and real estate markets, for example. In the stock market, the stronger economic growth outlook may finally trigger the expected sector rotation from growth to cyclical and value stocks.


The information presented is based on UB's own assessments and sources considered reliable by UB. The information on which the conclusions are based can change rapidly, and UB can change its market views without notice. As such, no information obtained through this presentation should be understood as an invitation to take investment measures.