Five top strategists at some of the largest asset managers break down the biggest challenges for Joe Biden's presidency and how to trade them

  • Transition turbulence is an ongoing risk, as President Donald Trump could further deteriorate relations with China in his final few months, UBS Asset Management says.
  • With no 'Blue Wave' win, here's how some major players are anticipating how a situation with President-elect Joe Biden's White House and the Republican-held Senate will play out, including the best currencies to own against the US dollar.
  • A stimulus package is likely to be in the $1 trillion region, even with a divided Congress, Goldman Sachs says.
  • Biden likely to still be firm against China, but his style is likely to be more multi-lateral and consistent which will benefit investors, Gimber said.
  • Visit Business Insider's homepage for more stories.

World leaders have congratulated Democrat Joe Biden and his running mate, Kamala Harris, on their victory in last week's presidential election. The race has been officially called by most major US media outlets, but President Donald Trump has refused so far to concede and still has several weeks left in office before he leaves the White House.

The global equity markets have hit record highs this week, buoyed in part by optimism over an end to Trump's chaotic and deeply polarizing first term, but also by promising results for a trial COVID-19 vaccine from drugmaker Pfizer this week.

However, with Trump mounting a series of legal battles to challenge the results of the election, volatility across the markets is fraught and there is still a lot of uncertainty about how a Biden presidency, in which his party does not control both chambers of government, might pan out. 

Five top strategists for some of the world's biggest asset managers break down what they believe will be the biggest political challenges Biden and Harris will face over the coming months and how to weather that uncertainty.

Transition turbulence

"With the Trump campaign not yet having conceded, we could still see some political and legal manoeuvring in the days ahead," Hugh Gimber, global market strategist at JP Morgan Asset Management, said.

Trump's election campaign has issued legal challenges to the election results in several states, but the UBS team ascribes "negligible, near-zero odds to a potential reversal of the declared outcome of the presidential election."

But for UBS, the threat of a non-peaceful transition of power is a pressing issue and one that has ramifications beyond the borders of the United States.

Evan Brown and Luke Kawa wrote in a report for UBS Asset Management that they see potential risk in the final actions of the Trump administration, and the potential for "a meaningful threat of an escalation in US-China tensions initiated by an outgoing president who may blame China as the cause of negative socioeconomic conditions that prevailed in 2020."

There is a "non-negligible risk of an escalation of tensions in the South China Sea or elsewhere in the region during this transition phase in US leadership," the team said in a note.

As a result, UBS argues that Chinese equities and bonds are attractive to investors, saying that it expects "continued gains, with Beijing indicating a commitment to prioritize employment and relax the deleveraging campaign." 

UBS are recommending overweight positions in financial stocks, health care, materials and industrials, and underweights in consumer staples, technology and utilities. 

US/China trade

UBS argues the Biden administration will have a softer outlook on US-China tensions, however it notes that the relationship is on a "irreversibly negative trajectory" regardless of who runs the White House.

"Technology will serve as a focal point in the continuing deterioration of US-China relations," the UBS team said. However, Biden is likely to "build multilateral coalitions with American allies to address China on matters pertaining to trade, technology, human rights, and the environment," the note added.

Moreover, there is likely to be a change of framing within the US approach, "building up the US" as opposed to attempting to curtail Chinese production, the note concluded.

This sentiment was shared by Rathbones in a note published Monday.

"The substance of Biden's trade policy is similar to Trump's, at least on China, but the style will change, and the maverick, unpredictable approach will likely be replaced with more measured, rules-based tactics that cooperate once again with the international institutions that have presided over decades of strong corporate profitability," it said.

This is good for investors, argues Gimber, saying that "a Democrat administration is likely to adopt a different approach to the US – China relationship. Biden's commitment to pursuing a more multilateral approach to negotiations should create a more predictable environment for investors."

Split Congress: for better or for worse?

A divided government is looking increasingly likely, now that the anticipated "Blue Wave" win didn't happen. And this will have consequences.

"Investors are factoring in the implications of less fiscal spending and a slower US growth outlook," JPMorgan's Gimber said.

With the prospect of a slimmer stimulus package, "pressure may build on the Federal Reserve to shoulder more of the burden in supporting the economy yet again. We see a reduced risk of early tapering of asset purchases than in a more pro-growth environment, which should lead to lower rates for longer and a relatively flatter yield curve," he added.

UBS cited the historic precedent of 2010 when the Republicans won control of the Senate, while President Barack Obama's Democrat party kept hold of the House. "Republican Senators took a hard line on government spending" which was a "drag on the unfolding recovery," the bank said.

However, their outlook remains optimistic arguing that Republican Mitch McConnell has"expressed a desire to deliver additional stimulus before year-end and openness towards aid to state and local governments as part of such a package" the note said, adding that "a scaled back stimulus is better than nothing, with a meaningful but slimming stock of household savings."

Fiscal stimulus will come in one of two forms, according to Goldman Sach's Alec Phillips.

The first option is a "'skinny' package in December followed by a broader bill in early 2021," Phillips said in a note on November 7, extending some widely supported provisions for just a couple of months and creating new deadline in the first quarter.

Alternatively, Congress could pass a broader deal before the end of the year – a "more likely scenario", Phillips said, admitting it was a "close call" but could go ahead for these reasons:

"First, neither party has as much to gain from postponing passage since Senate control looks less likely to change than it seemed prior to the election," he said. Also, Republicans will be eager to reach a deal ahead of the upcoming runoff elections in Georgia to avoid the perception that they are blocking fiscal relief. Lastly, "some fiscal measures are likely to pass in December along with the spending bill, and political tradeoffs might make it easiest to just pass the broader bill at that point."

Any package is likely to come too late to make sufficient impact on Q4 growth, Phillips noted, and any package will be slimmed down. In the case of a Biden White House and Republican-held Senate, the package is likely to be "around $1 trillion (a little less than 5% of GDP)," Phillips concluded.

Morgan Stanley took a look at how best to short the US dollar, depending on what happened with the next stimulus package. The commodity currencies offer the best scope to sell the dollar, while sterling and the yen are the top recommendations from within the G7 space, according to the bank's most recent research.

The Irish issue

Another effect from the Biden win will be its impact on the Brexit saga between the UK and the EU, according to Andrew Sheets, a Morgan Stanley strategist.

US lawmakers have already said there will be no chance of a US/UK trade agreement if Britain violates its international agreements and Brexit undermines the Good Friday accord.

Biden, a Delawarean proud of his Irish heritage, could pose a problem for Conservative Prime Minister Boris Johnson's hard-Brexit rhetoric. 

"We think that a Biden administration would be less open to a US-UK trade deal and more committed to the Good Friday Agreement than the current administration. Both factors would tilt the balance towards closer UK alignment with Europe and increase the chances of a 'deal' on Brexit," Sheets said in a note on Monday.

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