Here’re my thoughts:
For those who prefer to read…eh, read on:
At the time of writing, we do not know who has won the U.S. Presidential Election yet. But the consensus is that Biden is likely to win.
Today, we look into his campaign plans and how a Biden presidency will affect the stock markets.
U.S. Allies and emerging markets may benefit
“We will lead not only by the example of our power, but by the power of our example.”Joe Biden
In the past 10 years, US stocks led in the stock market returns, with +178%.
The gap has widen over the years thanks to the technological advancements and the spike in tech stocks in the US.
A friendlier ties with U.S. could help to close the gap.
Attitude towards China
Even with Biden taking over, we do not foresee that the hostile policies against China to be fully withdrawn. However, Biden is likely to be more measured in his approach towards China.
This means, Chinese companies may continue to face restricted market access and technological access.
Focus Shift: Human Rights
The Biden administration are likely to play up the human rights issues happening in China instead of the trade deficit;
“As president, I’ll put values back at the centre of American foreign policy. I will meet with His Holiness the Dalai Lama, appoint a new special coordinator for Tibetan issues, and insist that the Chinese government restore access for Tibet for US citizens, including our diplomats and journalists.”Joe Biden
This move could mean that companies with businesses in Xinjiang, Tibet and Hong Kong would be negatively affected, especially if their main revenue driving businesses are located within these geographies.
Companies like Hikvision (SZSE:002415) and Dahua (SZSE:002236) could see business take a hit if Biden presses on human rights issues. On top of that, their sales may also be affected by the embargo, trade limits and the security concerns raised by the U.S.
That said, the trade tensions are likely to persist even when Biden at the helm.
Huawei (red line) was affected the most during the bout. As shown here:
SMIC (SEHK:0981), a semiconductor manufacturer is not able to buy top end manufacturing equipment currently thanks to the ban. They now have to either source for equipment from the 2nd hand market or find ways to develop and manufacture the equipment within China (which could take years).
Probably the biggest benefiter?
There’s always a sliver lining. In the case of the trade tensions, it comes in the form of the Hong Kong Stock Exchange (SEHK:388).
Traditionally, bigger Chinese companies prefer to list in the U.S. for international exposure. However, with the trade war and uncertainty of their future in the US stock exchange, potential listings are moving into Hong Kong instead. Even the failed Ant Financial IPO was due to list in HKSE.
Over the years, Hong Kong has been growing and developing into an international financial hub for investors. We could see more Chinese companies being listed in Hong Kong in the near future.
We’ve already seen the HKSE benefitting with its share price rising +52% YTD as of 10 Nov.
Side note: bad news for companies whose businesses are in Hong Kong
Since Covid-19 started, we saw a truce in Hong Kong. However, the underlying issues have not been resolved. Riots and demonstrations could intensify after the pandemic blows over (who knows how long that’ll take).
Together with potential human rights policies that Biden may push for, companies whose businesses operate solely in Hong Kong, may face a greater hit.
Biden’s stance in Climate change is a stark contrast to Trump’s. The Biden administration plans to invest $1.7T in clean energy and green jobs during his presidency and pledges to net-zero greenhouse gas emissions by 2050.
Comparatively, Trump had pulled the US out of all climate related talks and policies.
This signals potential growth for the solar and wind industry, while the future for fossil fuels and Oil & Gas companies remain unclear.
Invesco Solar ETF (TAN) has ran up +141% YTD which is a rare return from an ETF. Comparatively First Trust Global Wind Energy ETF (FAN) is up +34% YTD:
Enphase (NASDAQ: ENPH) makes and installs solar planners, they are one of the best performers this year at +348%.
Comparatively, ExxonMobile (NYSE:XOM) has been down -47% YTD. Under the Biden administration, we could see restrictions placed on them. Restrictions are likely to increase their cost of operations while reduce supply. To add to that, once a vaccine is officially available, travel is likely to return and oil prices are likely to recover when airlines start their engines once again. If we reach that stage, the lower supply of oil could cause prices to surge. However for now, the future of O&G companies remain unclear.
China has been working to go green through their Five Year Plans, since 2001. With Biden on their heels, China may attempt to pick up their pace. Having both superpowers moving towards green energy could mean that coal demand may drop drastically. Companies like China Shenhua Energy (SEHK:1088) are already feeling the heat, with share prices down -13% YTD.
Impact within US
Higher costs for US Companies
Biden placed a strong emphasis on increasing minimum hourly wages and corporate taxes. If this is set in place, companies relying on cheap labour (eg. retail and F&B) or those with high profit margins (eg. tech) are likely to feel the greatest impact.
According to PayScale, Starbucks (NASDAQ:SBUX) pays as low as $9 hourly, for some roles. The potential increase of minimum hourly wages to $15 will increase the cost for said roles by about 60% and margins definitely will dip. (or they could charge us more, but that story is for another day)
Tech stocks like Apple (NASDAQ:AAPL) enjoy good profit margins. APPL reported a 21% net profit margin as of 30 Sep 2020. Should the corporate tax rate increase, APPL’s profitability will definitely be affected. They are up +58% YTD.
Fed and liquidity
In the 2008 financial crisis, the Fed started to adopt a loose monetary policy.In hindsight, that was nothing compared to their response to Covid-19:
This could have aid the growth of the US stock markets in the past 10 years. We may see an increase with the Biden administration.
Under a Biden presidency,
- US is likely to have friendlier foreign relations.
- They would also aim to reclaim their spot in leading the world.
- US-China tensions are likely to remain although Biden may bring a more measured approach to the table.
- Climate change will be a key theme
- Stocks are likely to be supported by the existing (and incoming) liquidity.