What the election means for international stocks
The promise of more normalized relations. Combined with Covid optimism, it’s positive.
As President-elect Joe Biden's administration settles in, we would expect more accommodative trade and tariff policies and—more broadly—a friendlier, more normalized tone, all favorable for international equities and especially emerging-market stocks. To be sure, the bigger issue remains the same as it was before the election: getting the coronavirus pandemic under control. A resolution—and there are hopeful signs this week regarding a vaccine—should deliver a substantial lift for the global economy and markets.
Indeed, improving prospects on this front, along with the U.S. election results and likelihood for continued divided government, prompted global stocks to begin this week with a big rally and led Federated Hermes to raise exposure to international stocks in stock-bond models. Value-oriented sectors that suffered the biggest hits during the global slowdown are likely to benefit the most, including Financials, Industrials, Energy and Materials.
As for a Biden White House, here’s our take on its potential impact in three key areas:
Economy & trade
- Before the devastating impact of Covid-19, the global economy was gaining momentum, so the end of election uncertainty combined with growing optimism about a post-virus economic recovery (bolstered by vaccine and treatment developments) provides a tremendous tailwind. We see it as a coiled spring about to pop thanks to a combination of higher savings rates, pent-up demand, substantial monetary and fiscal support and rebuilt inventories. We believe these effects will take hold by the second half of 2021.
- Because it’s expected he’ll be less confrontational in overall tone and trade relationships, Biden’s election likely will benefit non-U.S. stocks. His proposal to increase the corporate tax rate would be more negative for U.S. than European earnings, though it remains to be seen if there’ll be changes given Republicans appear to have a good chance of maintaining their Senate majority.
- There will be some uncertainty on the part of China, whose leadership understood President Trump, his priorities and his trade team. There is a broad, bipartisan consensus to put pressure on China, so any future policies are likely to continue to ramp up export controls, restrictions on investment, intellectual property exchanges and other policies enacted during the Trump years to disentangle U.S. economic activities from China. We expect continued measures to diversify the industrial supply chain out of China. The difference likely will be in tone.
- Biden’s proposed green energy and infrastructure plan will be tempered due to a split Congress. Nonetheless, a move toward more sustainable energy production and use was inevitable and it will receive greater support under a Biden administration, signaled by a return to the Paris climate accord. This should directly benefit some European companies, including those in construction, clean energy and technology.
- In the mix: China’s early exit from the coronavirus lockdown and stimulus measures should benefit its economy and emerging markets more broadly.
- In a substantial departure from the Trump presidency, we expect the Biden administration to foster more cooperation between the European Union (EU) and the U.S. That said, some pain points between the two can’t be ignored. Specifically, the Biden administration will face pressure to have Europe take greater responsibility for its own defense and security. But it will do so in a spirit of shared objectives. The overarching policy of a Biden administration will be to rally NATO and our EU allies in taking a stronger stand against Chinese and Russian aggression.
- One major outlier in the NATO alliance is Turkey. Biden, unlike Trump, is no friend of Turkish President Tayyip Erdogan. Of course, you can’t resuscitate NATO without Turkey, so while a Biden administration will take a tougher stance on Turkey, with greater likelihood of U.S. sanctions moving forward over Turkey’s purchase of Russian missiles, Biden will still need to salvage a relationship.
- Over the long term, we expect an increase in regional trading blocs around the globe versus broad alliances with China.
- The possibility of less hostile relations with Iran could result in more Iranian oil coming back onto the market, potentially lowering prices even as global energy demand increases.
- Closer economic cooperation under a Biden administration could bring fewer tariffs, supporting emerging markets and China-exposed stocks.
Global currency markets & the dollar
- Apart from the Russian ruble and Turkish lira, international currencies largely have rallied, reflecting greater prospects for a major stimulus package in the U.S., as well as a less confrontational approach to trade and tariffs overall.
- Under a Biden presidency, we expect a more rapid U.S. dollar decline given expectations for still-supportive monetary policy, greater fiscal stimulus, higher tax rates and overall higher deficit spending. As an offset, a Republican-controlled Senate likely will moderate those impacts, somewhat tempering the dollar’s decline.
What it all means
- Beyond U.S. election dynamics, a resolution of the coronavirus pandemic is poised to deliver a substantial lift for the global economy and markets. Value-oriented sectors that suffered the biggest hits during the global slowdown are most likely to benefit, including Financials, Industrials, Energy and Materials. A Biden administration’s more accommodative trade and tariff policies should lead to reduced trade risk and an increase in overall risk appetite, benefiting international equities and especially emerging-markets stocks.
Before the devastating impact of Covid-19, the global economy was gaining momentum. So the end of election uncertainty, combined with growing optimism about a post-virus economic recovery (bolstered by vaccine and treatment developments), provides a tremendous tailwind. We see it as a coiled spring that’s about to pop, abetted by higher savings rates, pent-up demand, substantial monetary and fiscal support and rebuilt inventories. We believe these effects will take hold by the second half of 2021, and that today’s markets are starting to price in those positive catalysts.