US election, investment market impacts, and the Coronavirus vaccine candidates for Australia

Biden makes ground as postal votes are counted

Joe Biden is in the box seat to become America’s 46th president after clinching two crucial Midwest states as Donald Trump escalated lawsuits and claims of vote fraud. The nail biting finish isn’t anything like the landslide the Democrats had hoped for, but it now looks very likely that Biden will get there after an intense 24 hours of vote counting and dramatic scenes involving protesters across the US.

Legal challenges brought by President Trump in the tightly contested states of Pennsylvania, Michigan and Georgia are unlikely to derail a Biden victory, with only one case so far filed deemed legally substantive enough to make it to the US Supreme Court.

At last count, Biden has won the most votes in American presidential history, with more than 72.1 million versus Trump’s 68.6 million. Biden currently sits on 264 Electoral College Votes to Trumps 214, and now effectively needs only one of four undecided states (Nevada, Pennsylvania, North Carolina or Georgia) to get the 270 tally needed to win.

How are investment markets responding?

Following on from today’s events and our previous update Support for Trump surges as Biden clings to hope of victory, we believe that a Biden win and a likely gridlocked US Congress (upper and lower houses) will provide the best case scenario for investment markets going forward. The All Ordinaries Index in Australia gaining 1.26% today on a good lead from the US markets overnight as likelihood of this scenario dramatically increased.

Joe Biden and the Democrats current position gives them control of the House of Representatives (lower house), but not enough to take control of the Senate (upper house) from the Republican’s. This means that Democrat Joe Biden’s plan to increase corporate taxes to 28% (from the 21% rate introduced by Trump), spend more on infrastructure, introduce more ambitious climate change measures and transition away from the oil and gas industry, faces a Senate roadblock. A major crackdown on the big technology platforms like Google and Facebook is also less likely under a divided White House and Senate, and sharemarkets like the prospect of this outcome.

Further to this, Biden is expected to be a more conciliatory and statesman like President, particularly on the trade and foreign policy issues that have bothered markets under Trump’s Presidency. Biden is set to have a more moderate discussion globally, and a more normal discussion about foreign policy and global institutions. We believe markets will respond well to Biden’s approach.

Bond markets have already priced in a Senate gridlock on fiscal (tax) stimulus, shares are adjusting as growth stocks rally on lower bond yields, and the possibility of further US Federal Reserve support (printing of money). If the final outcome is as we expect, Biden is likely to be more supportive of emerging markets and the trade rhetoric will be wound back.

On climate, Biden’s pledge to immediately re-join the Paris climate change accord can be done with the stroke of a presidential pen and without congressional approval, just as president Barack Obama did.

What’s next for Australia?

For Australia there are few direct implications other than the likelihood of more steady regional policy. This comes as the car market is showing signs of recovery after the Coronavirus induced slump earlier this year. The Federal Chamber of Automotive Industries says 81,220 new cars and trucks were sold in October, down just 1.5% on the same month last year. This indicates that the tax cuts and business tax incentives introduced by the Frydenberg-Morrison Government are taking effect. The Australian Bureau of Statistics also reported the trade balance in September increased $3 billion to $5.63 billion. It was the 33rd successive monthly trade surplus, with export values up 4% and imports down 6%. In addition to the further reduction of the official cash rate to a record low of 0.10% by the Reserve Bank of Australia on 3 November, these factors are indicating positive signs for Australia’s economic recovery post the Coronavirus induced shutdown and recession.

Back in the US, until the counting of every last vote is done, a Republican sweep of the Senate and Trump retaining the Presidency still remains a slight possibility. Although very unlikely, this outcome would also continue to support markets, but the main risk would be a more uncertain and disruptive trade and foreign policy which would potentially be more unsettling for emerging markets.

Whatever the outcome, the US election result is likely to have a short term impact as market expectations re-set to the expected US Congress gridlock and any impact on the level of additional stimulus spending. Ultimately returns are driven by company earnings and at this stage the earnings outlook for 2021 has improved sharply from a very low base in early 2020. However, clearly the impacts of the Coronavirus pandemic will continue to hang over markets once the election headlines settle.

Virus cases hit new record in the US

 Whilst the election has been dominating the media, the US has passed a grim milestone in the Coronavirus pandemic, with more than 100,000 new cases reported in a single day – the highest ever reported by any country in the world.

Coronavirus deaths are trending higher but not at the same rate as cases, which is the only positive news in a very bad situation. Sadly, the total cases of the virus recorded in the US are about to surpass 10,000,000 and total deaths 240,000.

The US and the world is anticipating that one of the vaccines in final phase trials will be approved as early as December this year, so that mass production can commence as quickly as possible. News of this outcome is likely to provide a further boost to sharemarkets around the world. However, supply will be a significant challenge, and if an effective and safe vaccine is found, there may be an initial reluctance to take the vaccine.

The four vaccine candidates in Australia

It has been reported in the press that Australian manufacturing of the AstraZeneca vaccine will begin next week. This vaccine is seen as the leading contender for success but has not yet been approved for use.

In addition to the CSL/University of Queensland vaccine, AstraZeneca is one of four vaccine candidates that the Australian Government has now invested in after deals with NovaVax and Pfizer were announced on Thursday 29 October 2020.

The Government is hoping that at least one proves to be effective in creating immunity to Coronavirus.

Below is a graph of how the four vaccine candidates stack up.

What does this mean for your investments?

With coronavirus risks still high until a safe and effective vaccine is finalised, investment markets may see more volatility, even though the outlook looks positive for the US election result.

Your high quality well-diversified portfolios utilising the best investment research available, are well positioned to take advantage of the long term growth, with the lowest possible risk.

Some key points on the investment outlook:

• After a strong rally from March lows, shares remain vulnerable to short term setbacks given uncertainties around Coronavirus and the final US election result. However, on a 6 to 12 month view shares are expected to see reasonable returns helped by a pick-up in economic activity and the massive policy stimulus by central banks around the world.
• Very low (or negative) interest rates around the world mean that bond and fixed interest investments will earn very little and are facing the very real prospect of capital losses. Great care must be taken with bonds and fixed interest investments going forward.
• Cash and bank deposit returns are likely to be very poor at less than 0.30% following the RBA’s cutting of the cash rate to 0.10%. A very low official cash rate and low inflation is likely to stick around for the foreseeable future, even years, as spare capacity is worked out of the economy. Determining what the important short term strategy needs are for you, and where capital stability is required is more important than ever.
• We also see opportunities to take advantage of investments that produce consistent and tax-effective income streams for your longer term objectives.
• Commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield, but the hit to economic activity and hence rents from the virus will weigh heavily on near term returns, providing some opportunities for the longer term.
• Home prices are expected to stagnate into next year as higher unemployment, a stop to immigration and the weak rental market impact.
• The Government’s $200 billion Quantitative Easing (printing money) program, which includes issuing another $100 billion Government Bonds to the major banks at the 0.10% interest rate, is providing very cheap funding for lending. Other stimulus packages including first home buyers grants are likely to stimulate the property market for those that are still in jobs, or can borrow.
• Although the $Australian Dollar is vulnerable to uncertainty about the global recovery and US/China & Australia/China political tensions, a continuing rising trend is likely if there is viable vaccine and threat from Coronavirus recedes.

As a final point, we recommend that you turn down the noise from the US elections and the Coronavirus pandemic and maintain focus on strategies that will maximise your long term outcomes. Please contact us if you have any questions specific to your personal situation.