The analysts of the investment banks comment on the results of the American elections: Joe Biden will be the new US president, but what will be the implications of a “divided government”, that is, with the presidency and House of Representatives for the Democrats and the Senate still for the Republicans?
Now is the time to understand what Biden’s first moves will be and the implications for the markets. A question that analysts from Carmignac, Pictet, JP Morgan, Candriam, Generali Investments and GAM try to answer. I emphasize that I am only reporting opinions and forecasts of various analysts, without my personal considerations.
With Joe Biden president, more relaxed international relations
According to an analyst at Pictet Asset Management, with Joe Biden as the next tenant of the White House “it is reasonable to expect a return to multilateralism and the abandonment of Trump’s aggressive dialectic: while on the one hand the anti-Chinese rhetoric is destined to persist, with more moderate tones (the rivalry with the Asian giant is, in fact, bi-partisan), it is plausible a renewed adhesion of the United States to international organizations, reviled by the last administration, starting with the WTO. An attitude that on the financial markets should favor emerging assets over the next few years”. Biden has in fact already announced the return of the US to the WHO and the Paris Agreement.
The increase in bond yields will be good for stocks
The analysts of the Macro & Market Research team of Generali Investments say “The initial decline in yields is likely to be temporary. The yield curve is expected to rise again given the positive supply of securities in 2021, even net of Fed purchases. Add to this the stabilization of growth and the slow rise in inflation. Consequently, the yield spread between Treasuries and Bunds should widen again”.
All of this should have positive effects on the stock market: “The limited increase in bond yields creates a positive environment for equities: as we expect the Senate to avoid substantial changes in regulation and taxation, the energy and technology sectors in particular will benefit”.
The Federal Reserve’s monetary policy will be a key element
For Carlo Benetti, analyst of GAM Investments, “the feeling is that the elections were above all noise, a great moment of mass distraction but with only temporary effects on the markets. The signal to watch remains the Federal Reserve, which silently leads the markets more than the statements of Biden or Trump. ” According to the GAM market specialist, “what matters is that generous cash flows continue to flow through the veins of the markets”.
Divided Congress: markets will appreciate
Biden’s confirmed victory in the presidential election will most likely be paired with a Republican-controlled Senate and a Democratic-controlled House, thus a condition of a divided Congress.
Andreal Delitalia, analyst of the Pictet team, explains that “a divided Government would not mind the market, on the contrary: the economic policy will be similar to that of the last few years without, however, the interference of the Trump presidency. And in fact, the markets immediately expressed their vote, with stocks rising sharply, falling rates and few currency movements”.
With a divided Congress, Democrats will struggle to carry out their most radical economic policy. According to JP Morgan “even if there was a near-equilibrium situation in Congress, it would probably be difficult for Biden to get through the proposals for large tax hikes and stricter market regulation; meanwhile, the current global trade war is expected to subside“. All this, in a context in which the policies of global central banks remain very accommodating.
Big Tech also benefited from the lack of “democratic wave”, which would otherwise have suffered a certain increase in regulatory risks and an increase in taxes.