Biden win with split Congress is “best outcome” for riskier assets, says Pictet chief strategist
Luca Paolini, chief strategist at Pictet Asset Management, says the US political gridlock of recent days following the closely-run presidential race – and the likely divided legislature resulting from the election – “is not as bad for financial markets as it seems.”
The battle for the White House between Donald Trump and Joe Biden was hanging in the balance on Friday morning, with a handful of states – including Arizona, Georgia, Nevada and Pennsylvania – still too close to call.
A larger turnout, particularly of increased mail-in votes as a result of the coronavirus pandemic, has delayed the final result.
Counts in the remaining states have gone down to the wire, which in turn could spark more legal challenges from president Trump, who claimed widespread electoral fraud, without offering any evidence, in an address late on Thursday.
But Paolini, chief strategist at Pictet Asset Mangement – the USD209 billion investment management arm of the Swiss wealth management giant Pictet Group – said that investors “can live with a divided government in the US”.
While the final outcome of the hotly-contested election is yet to be determined, Paolini said in a note that the so-called ‘Blue Wave’ predicted by pollsters and financial markets ahead of the election has not materialised.
That would likely curb any “leftward shift” in economic policy from a prospective Biden administration, he explained.
“Democrats may have retained control of House of Representatives but look to have failed in their bid to secure a majority in the Senate,” Paolini added, noting that the election result “lays bare how divided the nation has become.”
As a result, Biden’s ambitious tax and spending proposals would likely be “cut down to size”, with additional fiscal measures stopping short of the USD2.2 trillion that had been envisaged under a Democrat clean sweep.
At the same time, stricter regulatory measures on the energy sector would likely “meet stiff resistance from a Republican-controlled Senate.”
More broadly, a divided government has various implications for investors and hedge fund strategies.
“We believe a Biden win with a split Congress is perhaps the best outcome for riskier asset classes in the medium term,” Paolini said in Thursday’s commentary.
“Trump’s corporate tax cuts will stay in place while fiscal stimulus should turn out to be sufficient, not excessive. What is more, policymaking should become less erratic with Biden in the White House, which could reduce stocks' risk premium over time.”
Paolini said markets have reacted positively to the election outcome in recent days, with gains in equities and a decline in bond yields, and he suggested emerging markets – “in which we retain overweight position” – also stand to gain from Biden’s “more conventional approach to international relations.”
“That said, riskier assets continue to trade in a range that has largely held since September and there is nothing to suggest that the threat posed by Covid-19 has dissipated,” he added.
“So even if it appears that stocks are in a bull market and are likely to build on their gains next year, particularly in cyclical sectors, risks remain in the short term. Which means we cannot justify taking a more bullish stance.”