US Election – The Aftermath

As the projection of Joe Biden’s Presidential win translated into a certainty during the weekend, worldwide markets reacted positively. The Shanghai Composite rose around 2% on Monday, as investors saw Biden’s election as positive for trade and potentially less confrontational and more predictable than Trump’s relations with China. The S&P 500 ticked 1.17% higher, the DAX surged by just below 5% while the FTSE 100 registered a 4.7% increase. It is however difficult to ascertain how much of this performance is due to the US election and how much is thanks to the release of Pfizer’s early data which suggests that the company’s Coronavirus vaccine is more than 90% effective.

Although we are now edging towards the two-week mark from when Americans were asked to vote for their preferred presidential candidate, the questions which have arisen are perhaps more than what analysts were posing pre-election. Despite that the Republican Party is usually perceived to be more business friendly than the Democratic Party, primarily due to the corporate tax measures adopted by Mr. Trump in this legislature, the market still reacted positively to Mr. Biden’s election as it was looking likely that the senate would still be controlled by the Republican Party. The market perceives this as a form of reassurance that Mr. Biden will find it much more difficult to make major changes in the taxation policy. As the vote counting unfolded, this likelihood started diminishing and it is now up to the runoffs in Georgia, which will take place in January 2021 to determine whether the senate will sway into the Democratic Party’s way or whether it will remain as is. This means that a certain level of uncertainty will persist for at least another two months.

What has clearly emerged from the new President elect’s election campaign is that he intends to tackle the Coronavirus pandemic differently than his predecessor. He also seems to be inclined to favour other social measures such as extending Obamacare and prioritising the use of green energy. It is however uncertain whether this change in guard will have a significant impact on the trade relations of the US with its counterparts. Many believe that with the election of Biden, trade tensions between the US and China will de-escalate, however this does not mean that tensions between the two largest economies will be resolved anytime soon.

The ‘Buy America’ logo from his campaign shows that his thoughts are not so different than Trump’s. Relations between the US and China have not fallen to a lower point than that experienced under Mr. Trump’s administration in decades. Mr. Cheng Xiaohe, an associate professor of international relations at Renmin University in Beijing, believes that “the China-US relationship will not go back to where it was before, the relationship is so bad” While tensions will most likely persist under a Biden administration, the key difference, observers expect, will be in the approach.

Until the time of writing, China’s reaction to Mr. Biden’s election has been relatively muted as no Chinese Government has congratulated him – most probably as they are awaiting Mr. Trump’s concession. Chinese officials are most probably fearful that Mr. Biden, working in synch with allies in Europe and elsewhere, could prove more effective in confronting China’s growing economic and military might, especially since they may consider themselves to still be weaker than the US – despite being convinced that the US is declining in strength on an international scale. The Chinese government seemed eager to play down the US election – perhaps to avoid emphasizing the democratic process for a population that has no role in choosing its leaders.

The election of Joe Biden will most probably also impact the US’ relationship with the EU and the UK alike. Joseph Borrell, the European Union Minister for Foreign Affairs augurs that Mr. Biden will build bridges and normalise the relationship between the two parties, while the UK is perhaps less optimistic in reaching a trade deal with the US in the short-term as the president elect, unlike Mr. Trump, is renowned to not be a fan of Brexit and may therefore refrain from putting this up on the agenda.

What is clear so far is that Joe Biden has not disclosed much on how he intends to deal with certain issues going forward. This leads me to believe that this election was more an issue of more of trump or no trump, rather than a traditional race between two candidates. Now that Mr. Biden has won, the first question that comes to mind is; will he outline his plans in a concrete manner straight away or are we looking at a dejavu of the Bush-Gore event in the year 2000, which took the world around seven weeks to decipher the way forward?

If all works out well, the spotlight will then turn towards the moment when monetary, or more importantly, fiscal stimulus will be halted or perhaps reversed, as this will pose one of the greatest risks for financial markets. Selecting the optimal time when to take such decisions will have a big impact on stock markets. But, this is perhaps too far off to worry about right now.

David Baldacchino, MSc Wealth Management (Edinburgh), B.Com (Hons) Banking and Finance (Melit.), DipFA, is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]