US outlook
In the US, much of the attention is focusing on whether the next US president is going to be Donald Trump or Joe Biden.
However, the key debate is whether the winner can achieve a majority in congress.
Joe Biden is currently in the lead according to opinion polls and bookmakers, but key will be whether he (or indeed Trump) can win with a majority in both the House of Representatives and the Senate.
In the Senate in particular it is set to be a close encounter.
If we look at the key policies from the candidates, a Trump government would seek to boost US growth via tax cuts and, depending on the extent of its majority, perhaps further deregulate the financial and energy sectors.
The US dollar could hold its value or strengthen eventually. The yield curve is likely to steepen in relative terms, providing some support to banks. But, with monetary policy capping interest rates, any rise in bond yields is likely to be quite small.
On the other hand, a Biden government plans a large ‘green’ infrastructure plan, with managed healthcare also expected to be an area of focus.
However, corporate taxes would increase – a direct hit to corporate earnings estimated to hit 2021 EPS by around 10 per cent.
As with a Trump government, Fed action is likely to moderate any rate rise, so any curve steepening (and any benefit for the banks) is likely to be limited.
Reform and regulation could negatively affect pharmaceuticals, the tech sector and financials although these reforms could be delayed amid a fragile Covid-19 recovery.
The long game
Given this backdrop, investors in the coming months will have plenty to deal with.
We find that investors typically over-emphasise the impact of such events and instead are better off staying the course and keeping a long-term focus.
Often, investors focus on high-level asset allocation decisions but simply having a spread of bonds and equities in your portfolio is not enough.
The nuances that underpin the strategy also count.
We continue to diversify risk across asset classes and diversify the sources of return within those asset classes.
As we enter the last throes of the summer, investors continue to face uncertainty from the Covid-19 outbreak, a fragile recovery and still will face new challenges triggered by the US presidential election result.
They will definitely need a balanced strategy. They’ll definitely need to be targeted within asset classes. And they’ll definitely need to be diversified.
Toby Vaughan is chief investment officer at Brown Shipley
