INVESTMENT UPDATE

Investment implications of Democrats winning the Senate

  • 07 January 2021
  • 10 mins reading time

The 2020 US election process finally finished on 7 January 2021, more than two months after the original vote took place. As the dust begins to settle on the series of recounts, run-offs and outbursts of violence, we can consider:

  • The ramifications of the Georgia run-offs

  • The new administration’s priorities

  • The implications for US and UK investments.

The ramifications of the Georgia run-offs

For the first time since 1992, and only the fourth time in 50 years, Georgia has elected two Democrat senators. This gives the Democrat administration the 50 out of 100 senators, plus the vice president’s deciding vote, which it needs to be able to push budget-related and foreign policy legislation through the Senate.

This will be in contrast to what we’ve seen over recent days with Republican Senate house-leader, Mitch McConnell, rejecting proposed legislation for financial support and stimulus.

The new administration’s priorities

Democrats are now prioritising a more generous financial support and stimulus package, as well as efforts to tackle the virus itself. When we spoke to him in October, Lew Lukens (Senior Partner at Signum Global Advisors, former career diplomat and US Ambassador to two countries) suggested the following: “Insurance for unemployed, support for small businesses, stimulus cheques for American families and similar measures are likely to be pushed through in the administration’s first year.”

After that, as we mentioned in our briefing, US Election Outlook, the expectation would be for a new tax plan and an enormous infrastructure programme of $2.5 trillion or more being spent on roads, bridges and so on, but with a very heavy green technology focus.

As far as a trade deal with the UK is concerned, Lew warned that “a Biden administration would probably bring a six-month delay to proceedings for the simple reason that the new incumbents would want to examine the agreements that their predecessors had negotiated”.

So, instead of a bilateral trade deal being concluded around Autumn of 2021 under a Trump administration, its delivery date could be nearer Spring of 2022 under Mr. Biden. However, Lew doesn’t foresee any major differences in the content of the respective administrations’ deals.

Implications for investments

With these policies in mind, the increased demand for goods and services from some sectors that we mentioned in October look likely. These sectors include utilities, solar stocks, green initiatives and smaller companies that haven’t kept up with the tech giants during the lockdown. Those tech giants might also suffer now that the Democrat administration could try to push through stricter regulations for privacy and competition.

Meanwhile, the anticipated increase in government expenditure would have to be paid for, and that brings the potential for higher borrowing and taxes.

Our Chief Investment Officer, Marcus Brookes noted, in the same US Election Outlook, the potential for corporation tax to be brought from its current 21% up to 28%. This is lower than the 35% it was before President Trump came to power but, as Marcus pointed out, “that could knock up to 10 percentage points off profits, which would push stock prices down, especially the ones generating the biggest profits”.

At the same time, bond prices could fall as the government issues billions if not trillions of dollars-worth to help pay for the spending. But Marcus expects the US central bank, the Federal Reserve, to buy most of those bonds as part of its efforts to stimulate growth and inflation, limiting the fall on bond prices.

Conclusion

In short, the Georgia run-offs have delivered broad control to the new, Democrat-led administration. We expect this to generate a short-term boost in economic growth. The effect on US share prices might be limited though. For example, technology stocks have led the overall pricing of US stocks up, but they are facing the triple-whammy of higher corporate taxes, potentially greater government scrutiny, and a post-pandemic world in which the temporary uplift in demand for their services is unlikely to be fully sustained.

Finally, as far as UK investors are concerned, the positive benefits of US stimulus are likely to be offset by the delay in a trade deal and, perhaps more significantly, eclipsed by the post-Brexit environment to which the UK economy, and all its constituent regulations and companies have to adapt.

Important information

Any views expressed are our in-house views as at the time of publishing.

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Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

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