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Why a Joe Biden win isn’t “ground zero” for US tech stocks

18 November 2020

Trustnet speaks with several US large-cap funds to find out what impact a Joe Biden administration could have on the US market.

By Eve Maddock-Jones,

Reporter, Trustnet

In the run-up to the US presidential election, the prospect of a Joe Biden presidency had appeared to hold back the mega-cap tech stocks that have led the market higher in recent years.

During the election campaign, Biden had called for a rise in corporation tax to 28 per cent (from 21 per cent) and greater scrutiny of the technology names under antitrust legislation.

Now with the Democrat having been named president-elect – albeit with incumbent Donald Trump yet to concede – questions will now be asked what impact a Biden administration will have on the outlook for the US mega-cap tech names.

US mega-cap technology stocks have been the main drivers to performance of the S&P 500 in the years leading up to the Covid-19 pandemic and have been among some of its key beneficiaries as the digitalisation trend has accelerated.

Performance of global indices over 5yrs

 

Source: FE Analytics

These companies have thrived during the national lockdowns, as people and businesses have relied on technology to remain connected and working from home.

The greater growth outlook for such stocks has also boosted their popularity in the low rate environment.

But the outcome of the US election isn’t all bad news for the US tech stocks, according to Merian Global Investor’s Ian Heslop. In fact, this was possibly the best outcome tech stocks could have had.

As manager of the £1.9bn Merian North American Equity fund, Heslop holds a number of large-cap names in its top-10, including Apple, Microsoft, Amazon, Alphabet and Facebook.

Heslop said Biden winning the election does bring some positives to markets, but for “tech land”, the best outcome was the absence of a Congressional ‘blue wave’.

As it stands the House of Representatives will be held by the Democrats and the Senate will remain Republican. This, Heslop said, creates a political gridlock which should prevent any of Biden’s more “extreme” policies on tech from being passed.

“It’s a cliché but it’s worth repeating that a division between the presidency and the House of Congress and Representatives normally leads to a more constrained government and hence more conducive impact to the economy and normally to the stock market,” he said.

“We’re going to have a Republican Senate which will unfortunately want to make the administration look like a failure, so it will put barriers in place in relation to what they can and can’t get through.

“So, I think that kind of takes away some of the concern that maybe we would have had.”

He continued: “I don’t think they’re in a better place than they were necessarily with Trump in the White House, but I don’t think that it’s ‘ground zero’ for tech like it might have been with a win in the Senate as well.”

The Congressional divide was one of the key elements for the tech outlook highlighted by Julian Cook, a portfolio specialist on the $1.2bn T. Rowe Price US Blue Chip Equity fund.

He said: “The most important feature of the Biden victory is that it has been accompanied by a Republican majority in the Senate.

“This divided government potentially tempers policies that Biden would like to pursue that would have been more achievable and expected under a Democratic sweep or ‘blue wave’ scenario.”

But while a Biden presidency may not have been the outcome all companies wanted, his win does bring a level of certainty back to the US, Merian’s Heslop added.

The manager said that markets can expect a more “normal decision-making process, where policy is thought through rather than decided on the strength of a tweet”.

He said the ability to forecast what government policies will look like would be a positive for markets.

Heslop explained: “From an outcome perspective, it’s likely that this is the best that we could’ve hoped for. That we have a more normal politician in the White House, but with constraints on his abilities.”

Heslop added: “I think that the perennial question in relation to the US market is how much longer can this kind of growth, quality growth type trade can continue.”

Indeed, news of a Biden victory – coupled with greater prospects for a Covid-19 vaccine – during the past week has seen coronavirus-hit US value stocks rally. While this has not been to close the significant performance gap between the two styles, there has been greater cause for optimism.

Performance of style indices over 1mth in US dollars

 

Source: FE Analytics

While a change in the US presidency isn’t enough to start a market tilt into value, Heslop said, a vaccine could boost the long-term prospects for the style.

“I think it is difficult to argue that a Biden presidency necessarily leads to a value rally,” he said. “I’m not a big buyer of that argument that we’re going to see such a material change to the US economy; that we see a material rotation.”

T. Rowe Price’s Cook agreed, adding: “We still believe we are in a low interest rate, low growth, low inflation environment that tends to be supportive for secular growth companies in the US.

“Having said that, there may be pockets of rotation in the market if we see spiking US GDP growth accompanied by adjusted inflation expectations.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.