Will a new President mean a new chapter for the US?

After an election which saw everyone hold their breath, Democrat Joe Biden will be the 46th President of the USA. Although recounts and legal actions may still be outstanding, markets have already rallied strongly on the back of less uncertainty. Still, the endorsement of Biden was more muted than expected, and Congress control remains uncertain. What factors, in the era of The Great Instability, will influence (and be influenced by) American politics?

Democrats have maintained a majority in the House of Representatives, although this has shrunk. But, in order to enact his programme, Biden needs support from the Senate too. Democrats currently have 48 Senators. Republicans have 50. Two seats will be assigned by Georgia’s runoff elections in January 2021. Only if Democrats win both will they have control – thanks to the casting vote allocated to Vice-President Kamala Harris. In any case, their hopes for a robust Senate majority are gone, and the filibuster rule (allowing just 41 Senators to block most legislations) will make things harder. In Georgia, Republicans seem to have an edge but, due to recent demographic changes, writing off the Democrats’ chances would be premature.

Still, what are Biden’s legislative plans? Apart from virus containment and fiscal stimulus to speed the recovery, Biden promised infrastructure spending and a broadening of health insurance coverage. Corporations and high-earning individuals would need to pay more tax, as part of a broader framework which addresses inequality; this may implicitly see the government playing a larger role in citizens’ lives than it has done traditionally in the US.
Other policies include the federal minimum wage, unions’ participation in wage setting, and the enforcement of existing labour legislation. On top of this, some Democrats remain keen to re-examine the enforcement of competition law and take further steps to reign in the power of technology companies and other sources of corporate influence. At a time like this, where global variables are more interconnected than ever, these policies would have significant market implications. But will Democrats really pass them?

In the meantime, attention will focus on the President’s executive orders, such as initiatives to tackle the pandemic, re-joining the Paris Agreement and reversing the purge of environmental regulation. But mostly, all eyes will be on who Biden chooses to run his administration.

Will Biden keep his promise of representing all Americans? He invited Republicans to speak at the Democratic convention in August and might include some in his team. This will frustrate some fringes of his party. The desire to defeat Trump had buried most of the internal disagreements, which are now likely to re-emerge – as briefly happened during the election campaign, with the debate about the urgency of reforming the Supreme Court.
Similar divisions might arise around any reform, and their cost would be high, especially as Senate majority will be razor-thin at best. How aggressively should the Democrats pursue their goals? Biden’s choices to fill his administration will be an early answer.

A lot of attention will also be focused on foreign affairs. Trump saw alliances and global free trade as a scam and prided himself on his unpredictability. Biden will have a more traditional approach, building upon his long experience in foreign affairs.
While scepticism about the merits of free trade will remain, he is not going to slap tariffs on countries such as Canada on ‘national security’ grounds. A less erratic approach should help reassure companies that operate, and rely upon, global supply chains. But the major foreign policy challenge is how to handle China.

Under Trump, the US and China saw trade and technology very differently, to which Biden may add a human rights element. Still, Trump and Biden might agree on some problems, but not on the solutions.
Although there is bipartisan support in the US for a tougher stance on China, and Beijing sees the relationship as permanently shifted away from the benign pre-Trump era, a Biden administration is perceived as an easier one to deal with. Based on multilateralism, it will likely oppose unilateral tariff increases and roll them back – positive news for trade and the renminbi exchange rate.
The rollbacks won’t be easy, however, and Biden will decide after consultation with allies. Meanwhile, will China offer favourable terms to facilitate negotiations and fulfil its commitments in the ‘phase one’ trade deal?
Moreover, ending the trade war won’t necessarily end the tech war. There is a strong consensus in the US for curbing China’s access to critical technologies. Biden is unlikely to reverse Trump’s tech export controls – they might even increase, albeit less frequently. Nonetheless, he will handle tech-related national security issues more flexibly, and some companies on both sides may get a reprieve.

Biden’s stance on Taiwan and the South China Sea is to keep the status quo, while committing to the One China Policy and the Taiwan Relations Act, and he intends to re-enter the Iran nuclear deal. Also, Biden might revive the Strategic and Economic Dialogue with China and reopen the consulates in Chengdu and Houston.
Beijing may also try to cooperate on climate change and energy. Biden has set an ambitious goal of US carbon neutrality by 2050, and Xi Jinping has pledged the same by 2060.

Finally, how might these uncertain outcomes influence the markets? The fiscal stimulus would push up income, promote spending and create jobs. In the past, the US Federal Reserve tended to react to fiscal expansions by raising interest rates quickly, to avoid an outbreak of inflation. But after last summer, has monetary policy exhausted its options? If that’s the case, growth will solely rely on fiscal policy. Inflation and bond yields are likely to stay low, and the process of ‘Japanification’ will continue.

The equity market’s early reaction to the election was to unwind the ‘blue wave’ trades that counted on significant changes in energy, finance, healthcare and technology. But now, with the prospect of more limited legislative and regulatory changes due to uncertainty in the Congress, the fiscal stimulus becomes the remaining driver. Will it be passed? On what sectors? And how large will it be? These will be key points of attention for investors.

Plus, of course, we can’t forget about COVID-19. While the recent announcement of better-than-expected vaccine results has boosted risk assets, cases are still surging. Markets will be balancing the near-term risks to growth against what should be a more positive medium-term outlook.
Finally, shouldn’t the unlikeliness of a short-term ‘blue wave’ also mean no immediate tax increases or re-regulations? Markets may not always get what they want, but sometimes they get what they need.

As instability can create opportunity, the consequences of such an important election in today’s unstable world deserve a lot of attention. At BNP Paribas Asset Management, we look at investment from every angle. What might seem stifling from one point of view could present a real opportunity for growth. That’s why we investigate before we invest, and look beyond the headlines to explore the good, the bad and the ugly of today’s world.