President Joe Biden was officially inaugurated on 20 January, offering a dramatically changed political outlook from the outgoing Trump administration. Equally significant, Biden enters office buoyed by a “blue wave” that has seen Democrats gain majority power in the Senate while retaining a majority in the House of Representatives, granting the party effective control of both the legislative branch and the presidency for the first time since 2011.
Though the new administration will be faced with numerous economic challenges, it will have the political clout to enact drastic policies to tackle them. What does this mean for investors on the hunt for prime stocks? What are safe bets, and what bubbles may soon burst?
Green Energy
“Build Back Better” has been a common slogan ever since the 2020 campaign, broadly summarising the new administration’s aim for the US economy. The Biden-Harris campaign website specifies the creation of “an equitable, clean energy future” as a key plank in this. With the spectre of climate change becoming an ever-greater threat to the global economy, we can expect to see a good deal of renewed attention given to green business.
Naturally, this is good news for companies with a focus on renewable energy. Investors may soon see positive movement in NextEra and other utilities with wind and solar assets. Clean energy system manufacturers such as First Solar and Emphase Energy are also worth a look – as are electric vehicles companies. With Biden having voiced ambitions of creating 1 million jobs in the auto sector and incentivise EV production, the future looks bright for the likes of Tesla and Workhorse Group.
Infrastructure
Alongside Biden’s promises of greater green energy investment is a pledge to invest comprehensively in American infrastructure. Roads, bridges and energy grids are all noted as areas of concern that will soon see government investment.
With the spectre of climate change becoming an ever-greater threat to the global economy, we can expect to see a good deal of renewed attention given to green business.
A natural beneficiary of this focus on infrastructure (if Biden is serious) would be construction companies like building materials supplier Martin Marietta and equipment maker Caterpillar, both of which were heavily impacted by the onset of the COVID-19 pandemic but have since rebounded. It’s a telling portent that the Global X US Infrastructure Development ETF (PAVE), which tracks some of the largest industrial, construction and transportation companies in the US, saw a rally in the week of the election and an overall jump of 26% in the past three months.
While the optimistic rumours of a big infrastructure deal may not come to anything under the new government, telecom providers in particular can expect a boost from Biden’s promise to work towards universal broadband. AT&T, Comcast and Verizon, among other big players, can be expected to make significant gains.
Big Tech
Tech giants like Amazon, Google and Facebook occupy a strange position in the US economy. Though their market values have never been higher, and they have managed to keep up consistently high performance during the COVID-19 pandemic while other businesses have foundered, politicians from both sides of the aisle have managed to find an opponent in big tech.
Now, with majority power in Congress, Biden and his party are in a position to heavily regulate or even break up the “Big Five” of Amazon, Apple, Facebook, Microsoft and Alphabet. Notable Democrats like Elizabeth Warren have come out in support of breaking up tech giants; the Democrat-led House antitrust committee has found that the Big Five “hold monopoly power”. Biden himself has publicly criticised Facebook for providing a platform for his predecessor to “spread fear and misleading information”, though he has stopped short of recommending its breakup.
With tech companies enjoying more influence than ever before, it remains to be seen just how far the new administration will go to curb their power. The September and November tech selloffs have shown that the Big Five’s stock is not invincible; 2021 may see the end of tech giants as a sure bet for investment.
Though their market values have never been higher, and they have managed to keep up consistently high performance during the COVID-19 pandemic while other businesses have foundered, politicians from both sides of the aisle have managed to find an opponent in big tech.
Cannabis
Though not as high-profile an issue as climate change, the debate surrounding the regulation of cannabis played a role in the outcome of the presidential election and will likely have consequences for the markets. Biden’s campaign platform included the decriminalisation of cannabis at the federal level, which – while not the same as outright legalising the drug – would pave the way for long-awaited cannabis banking reform and greater acceptance of the substance’s recreational use over time.
Several other Democrat leaders, including New York governor Andrew Cuomo, have vocally supported the legalisation of cannabis, as have 66% of Americans, which bodes well for the future of the industry. Worldwide cannabis sales tripled to almost $11 billion from 2014 to 2018; Wall Street analysts predict that figure could land anywhere between $50 billion and $200 billion a year by 2030. In the shorter term, investors may want to keep a close eye on Canadian cannabis producers such as Organigram Holdings or Harvest Health & Recreation Inc – or Tilray, which managed to double its value in January alone.
More Broadly
One of the final sectors that is sure to see movement in the Biden era is healthcare. Looking past the headline-making pharmaceutical companies producing COVID-19 vaccines, and the fact that Biden has not embraced “Medicare for all” like many of his fellow Democrats, the health industry will undoubtedly be boosted in at least some areas by the new president’s policies. Biden has promised an option “like Medicare” for individual health plans, a boon for existing Medicare supplemental plan providers like UnitedHealth Group. As many as 23 million Americans could be made eligible for Medicare under Biden’s policies, which is sure to elevate healthcare fortunes.
And to move back from specific industries, there is reason for investors across the board to take note of the incoming administration’s policies. Biden has stated his intention to raise the corporate tax rate back to its pre-Trump level of 28% and to tax foreign income more aggressively, which obviously bodes poorly for the stock market. But before that can occur, a $1.9 trillion COVID-19 stimulus package is sitting on the table, sure to lift US markets broadly should it pass Congress.
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This stimulus package and the measures that may follow it, with a second spending plan slated to arrive “in the first few weeks” of Biden’s term, should give traders plenty to be optimistic about in the short term. Whether the specific industries listed above ultimately see their fortunes raised will depend on negotiations in government and the evolution of external factors like the ongoing pandemic, but prospective investors would do well to plan for the new president’s policy objectives in the years ahead.
On the heels of Election Day, capping one of the most contentious presidential election cycles in US history, markets have been roiled by the combination of an unclear victor – with millions of absentee ballots yet to be counted across several key states – and a premature claim by President Donald Trump that he had won the race.
European markets reversed their gains from Tuesday, when investors had been betting on a clean victory for Democratic presidential nominee Joe Biden. The FTSE 100 lost 1.1% as trading opened, with the CAC 40 and DAX falling 1.4% and 1.9% respectively. Yields on popular bonds also slipped as investors took refuge, with demand rising for US Treasuries and German Bunds.
Wall Street futures fell following Trump’s comments on Wednesday morning, but quickly recovered. The S&P 500 gained 0.5% while the Dow Jones lost 0.2%, and the tech-focused Nasdaq jumped by 2.5%.
“The polls are proving wrong again,” said Giles Coghlan, Chief Currency Analyst at HYCM, pointing to the near certainty of a contested election in accounting for markets’ new uneasiness. “As we are already seeing this morning, the Dow Jones and US Dollar will be in a volatile state until there is a clear outcome that both parties will accept.
“US stocks are selling off on the uncertainty, reversing the gains expected from a Biden victory as projected by the polls. This will also have significant ramifications on the performance of other major currencies and assets. So long as the uncertainty remains, I’m expecting investors to sell global equities, and their holdings in currencies like the Euro and US Dollar. At the same time, we should see inflows into the Japanese Yen.”
Giles also remarked that there are still reasons to be optimistic in the medium and long term. “Regardless of who is the next US President, the coming US stimulus bill should lift US stocks, once we have a winner confirmed,” he said. “Furthermore, over the medium term, even if gold sinks a little lower on a firmer US Dollar, the price of this safe haven asset should still rise in the coming months and into 2021. Low interest rates are projected to remain unchanged for the next three years by the Federal Reserve, and the large quantitative easing program will support the longer-term appeal of gold.”
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Nigel Green, founder and chief executive of deVere Group, urged investors to exercise caution as the results of the election are challenged in court. “This monumental uncertainty in the world’s biggest economy is going to send global stock markets into a tailspin as investors get rattled about a clear outcome taking longer to reach than they hoped,” he said.
The CEO added that renewables, industrials and cyclical stocks are likely to perform well under a Biden administration, while the oil and gas, financial and healthcare sectors will likely do better under Trump.
“History shows stocks tend to rise regardless of which party controls the White House, but it matters how your portfolio is balanced,” he said. “Therefore, investors should sit out the temporary volatility until the picture becomes clear.”
Giles Coghlan, Chief Currency Analyst at HYCM, takes a look at both candidates and the significance their victories might have for investors.
This week’s US presidential election will certainly be one for the ages. American voters will be heading to the polls today to elect Joe Biden as the 46th US President or continue with another four years of President Donald Trump. If you believe the polls, Joe Biden is edging ahead of Donald Trump. If 2016 taught us anything, however, the polls should be viewed with a grain of salt.
Investors and commentators have certainly learnt some important lessons, with many adopting a ‘wait and see’ approach. Those who hedged against a Trump victory in 2016 saw their portfolios take a big hit, though the equities rally in response to Trump’s corporate tax cuts likely helped such investors recuperate their losses over his premiership.
For now, it is important to consider what either a Trump or Biden victory could mean for the financial markets. Both candidates have touted some policies which will no doubt affect the performance of different assets. While everything is still up in the air, there are still significant observations to be made which I have detailed below.
President Joe Biden
First and foremost, I expect that investors will flock to green energy companies listed on the Dow Jones if the Democrats emerge victorious. Although not fully implementing the “Green New Deal” proposed by Democratic members of the House of Representatives, Biden has voiced his support of renewable energy and shown a willingness to gradually ween the US economy off its’ dependence on petroleum oil. At the very least, a Biden administration would be keen to re-join the Paris Climate Accords that Trump pulled the US out of in 2017.
Biden’s strong chances at securing the Presidency at present have already bolstered green energy stocks, with the First Trust Nasdaq Clean Edge Green Energy Index Fund currently trading at an all-time high. Upon a Biden victory, there could be an immediate surge in stocks related to renewable energy; including companies involved in solar, wind, and battery storage.
First and foremost, I expect that investors will flock to green energy companies listed on the Dow Jones if the Democrats emerge victorious.
Tump Back in the House
Although The Economist currently places the chances of a Trump re-election at only 5%, it’s still worth considering how the markets would react to such an eventuality.
One would anticipate an immediate short-term dollar bounce as global markets prepare for the potential heightening of the US-China trade war. As for the long term, although the Dow Jones reacted positively to Trump’s previous corporate tax cuts; more reforms would be needed to counter the negative effects of the aforementioned trade war.
There have been signs that Wall Street, no longer the political monolith it once was, has soured to Trump – indicating a lack of fear that equity markets would be negatively affected by a Biden win.
However, there is one outcome investors should be especially wary of: one in which Trump loses the electoral college but refuses to participate in a peaceful transfer of power.
A Contested Election
Trump’s consistent attempts to cast doubt on the legitimacy of this week’s election has inspired numerous American business leaders to warn the public about such a scenario, with LinkedIn co-founder Reid Hoffman recently stating: “the health of our economy and markets depends on the strength of our democracy", and that any dispute regarding the election’s outcome would "cause havoc in the business world”.
This is understandable. If 2020 has shown us anything, it’s that markets react negatively to instability and uncertainty. Uncertainty about who is the legitimate President of the United States, therefore, would imbue a fairly high amount of uncertainty into the global markets. This has essentially already been demonstrated throughout the year, with markets wavering each time Trump casts doubt concerning his eventual departure from office.
So, in summary, there are multiple ways that that different outcomes of this week’s presidential election could influence global market stability. For those nervous about their portfolios it is important not to make any rash decisions in a bid to secure short-term gains or to mitigate sudden unexpected losses.
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While the financial markets will undoubtedly react to the events listed above, investors should always take a long-term perspective. Understanding how currencies, commodities, and financial markets are likely to be affected by a changing geopolitical environment is always paramount; however, the long-term impact is always more consequential than the immediate one. Those hoping to make effective, prudent investment decisions would do well to remember this.
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In a statement on Monday, BP confirmed that it plans to sell its global petrochemicals business to INEOS for a total consideration of $5 billion.
In addition to meeting BP’s goal of divesting $15 billion worth of assets, the move fits new CEO Bernard Looney’s wider plan of radically overhauling BP from an oil giant into a key player in the clean energy market. Looney lauded the petrochemicals sale as “another significant step” towards reinventing BP as a company that can survive the energy transition.
“Strategically, the [petrochemical business’s] overlap with the rest of BP is limited and it would take considerable capital for us to grow these businesses,” the CEO said in a statement. “As we work to build a more focused, more integrated BP, we have other opportunities that are more aligned with our future direction.”
In a statement of his own, INEOS’s billionaire founder Sir Jim Ratcliffe said: “We are delighted to acquire these top-class businesses from BP, extending the INEOS position in global petrochemicals and providing great scope for expansion and integration with our existing business.”
BP’s petrochemical interests have been struck hard by 2020’s sharp decline in oil prices, leading to a write-down of between $13 billion and $17.5 billion in its earnings for Q2.
As part of the agreed terms of the sale, INEOS will pay a deposit of $400 million and a further $3.6 billion upon competition, with the remaining $1 billion to be paid in instalments between March and May 2021.
Written by Jon Williams, PwC partner and Member of the FSB Task Force and Stephanie Chang, PwC Assistant Director
Climate change presents risks that are not only being felt today, but will continue to generate both physical impact and low carbon transition risks that could affect companies’ financial performance. Climate policy such as a carbon tax could drive up production costs, while physical climate impacts have the potential to disrupt supply chains. Technological responses to combat climate change could shift demand curves for established markets, and energy policies that favour renewables could leave the value of carbon emitting assets impaired.
Figure 1: Decarbonisation pathways from the PwC Low Carbon Economy Index 2016
As the providers of financial services and capital to companies exposed to such climate risks, financial institutions including banks, asset managers, and insurers are increasingly trying to come to terms with how such risks could transfer to them and ultimately to those whose interests they manage. This necessitates a broadening of the traditional scope of risk management to adapt to the fundamental changes to markets and business models wrought by climate change.
The challenge for the financial sector is that climate-related reporting has historically evolved around environmental metrics such as greenhouse gas emissions or water use. These are useful measures in some instances, such as working out the direct implications of a carbon tax, but may be of limited use in others, for example in trying to understand the implications of changes to the demand for conventional cars and electric vehicles. A further limitation is that such reporting tends to be backward-looking.
The Financial Stability Board (FSB) recognises that without the right disclosures, the financial sector will not have access to the information necessary to make well-informed lending, investing, and underwriting decisions. And if climate risks aren’t well understood and correctly priced, the financial system may be prone to abrupt market corrections. In other words, pricing in climate risk allows decisions to be made based on more complete information, and enables risk functions to move from gatekeepers to strategic business partners.
In response to this, Mark Carney, as Chair of the FSB, established the Task Force on Climate-related Financial Disclosures (FSB-TCFD) which has recently launched their recommendations for improved reporting. We have developed a short summary for business leaders.
At the very least, the recommendations will mean that reporting the financial impacts of climate change will be on the board agenda, as they consider the mid to long term implications of climate risks on their business, strategies and financial performance, for example through the use of scenario analysis. The recommendations are due to be finalised by mid-2017.
Widespread uptake of the recommendations will mean that financial institutions will have access to consistent, comparable data which will aid risk management and disclosure at the financial institution level. A key challenge for financial institutions will be to assess current processes and systems for collecting and analysing such data, and consider how such enhanced information can be best incorporated into existing risk management and financial reporting frameworks.
Those who act first will be best placed to capture the arbitrage while others get their houses in order to price in climate risk. Appropriate pricing of risk should mean that capital is deployed in ways that make financial sense for businesses - including the capturing of climate-related opportunities. Is this perhaps a situation where the planet and profits do not have to be at odds?
For more information, please visit:
http://www.pwc.co.uk/services/sustainability-climate-change/climate-risks-and-the-fsb-task-force.html
Global M&A value in the power and renewables sector has reached the highest level seen in the current decade – up 70% year-on-year - and any further upward movement would begin to move sector deal value back towards the heady levels last seen before the credit crunch, according to PwC and Strategy’s latest annual Power and Renewables Deals report.
The report states there is plenty of potential in the global power and renewables M&A pipeline but the latest surge may not be indicative of the long-term trend. A more globally-balanced spread of deals is expected in 2015 with fewer of the US mega-deals that buoyed 2014 totals. But the flow of divestment- and privatisation-driven deals looks strong and so there are plenty of reasons to think any dip in US deal value will be taken up, in part at least, by activity elsewhere.
The report found total worldwide power and renewables deal value rose from $143.3 billion (€126 billion) in 2013 to $243.1 billion (€215 billion) in 2014. It’s the first time the total has broken out of the $100-200 billion (€88-176 billion) range established since the pre-credit crisis year of 2007.
A series of big but one-off restructuring deals in the US gas sector, involving Kinder Morgan and Williams, contributed $92.2 billion (€81.4 billion) to the worldwide M&A total.
