The US Election: Which Issues Are Our Investors Watching?
On Nov. 8, American voters will go to the polls to choose the next president of the United States, and global investors will await the potential ramifications of that decision — from short-term market volatility to long-term policy changes. As Election Day nears, we asked two of our investment experts — representing equities and real estate — to weigh in on the issues that they’re watching and the portfolio changes that they are (or are not) making in anticipation of the vote.
What do you see as the potential market impact of the upcoming presidential election? Do you expect the impact to be short or long term?
Jeff Everett, Co-Chief Investment Officer, Invesco Global Core Equity team: The 2016 presidential election will take place in the midst of an almost unprecedented economic situation that continues to couple very low interest rates (the lowest since the 1940s) with below-par economic growth. While a few bright spots have appeared recently on the economic front in the United States, including an increase in US manufacturing sector job openings to the highest level in 15 years, it remains unclear whether they are harbingers of a more powerful and broad-based recovery.1
When assessing the candidates’ positions and the potential impact of their campaign promises, it is important to consider the likelihood that these promises will actually be implemented. As a general rule, Republican candidate Donald Trump’s ideas would seem to be more easily implemented should Republicans maintain or increase their current majority in Congress. If Democratic candidate Hillary Clinton wins and Congress remains controlled by Republicans, on the other hand, her experience in government may nevertheless allow certain policies to pass (for example, her infrastructure plan, discussed below), though not without hard questions on funding from Congress.
Congressional outlook and implementation probabilities aside, both candidates have hinted at initiating policies to reinvigorate economic growth, and though both potentially offer longer-term benefits, the implementation of plans by either candidate might also generate a short-term boost to investor psychology following a period of Congressional policy stasis. Campaign rhetoric suggests tax reform will likely garner a preeminent place in either administration. While tax reform has been more heavily featured in Trump’s rhetoric — such as his proposal to create three individual tax brackets and lower the corporate tax to 15% — a historical look at taxes in former President Bill Clinton’s administration shows the importance of tax policy. The US economy suffered after the 1993 tax increase ushered in by the Democrat-controlled Congress under President Clinton; however, tax relief in 1997 led by a Republican Congress (e.g., lowering capital gains taxes from 28% to 20%, instituting higher limits on individual retirement accounts) helped improve the economy, improve tax receipts and usher in balanced budgets at the federal level. Given her role as First Lady at the time, it is likely that candidate Clinton understands and remembers this history.
Another policy with important longer-term implications in our view is infrastructure investment. American infrastructure is aging — for example, the average age of 600,000 bridges in the US is 42 years versus an expected life of 50 years; 10% are currently classified as structurally deficient.2 At the same time, infrastructure investment has fallen below a 60-year trend in America (federal gross fixed capital formation was 1.5% of gross domestic product in 2014 versus 5% in 1953).3 The Clinton campaign has proposed a $275 billion plan to help rebuild aging American infrastructure; while Trump has not yet laid out a detailed plan, he has indicated that he would spend twice Clinton’s proposed amount on infrastructure enhancements. Given that infrastructure comprises long-lived assets with multi-decade paybacks, and given today’s very low interest rates, it seems hard to argue for a better time to invest in infrastructure. Beneficiaries could range from materials companies to engineering companies to renewable energy companies.
Finally, health care is an issue that has received a lot of attention this election season, which has translated into increased volatility in the sector. As my Global Core Equity team colleague Derek Taner recently noted, however, actually enacting health care legislation is not easy to do. Multiple special interest groups, diverging political philosophies and strong lobbying efforts make passing health care laws difficult — especially if neither party holds 60 seats in the Senate. While much attention is being focused on the presidential race, Mr. Taner notes that the makeup of Congress is important. Polling data as of late October suggests that we may be headed for a Republican House and a Democratic Senate. However, in this election especially, pollsters’ predictions could be upended by an expected influx of new and newly energized voters, as well as a possible exodus of established voters who are unhappy with the top of their tickets. For example, a Democratic House, while currently an unexpected result, could increase the likelihood of health care reform.
Mr. Taner, who is the lead portfolio manager for our global health care strategy, believes that the underlying fundamentals of the health care sector are attractive, and history suggests the election could provide investment opportunities if drug pricing is not targeted as a high priority reform by the next president. The risk remains, though, that health care could become a key agenda item for either candidate.
Timothy Bellman, Head of Global Research, Invesco Real Estate: There could be a wide range of potential impacts on real estate markets given the various potential election outcomes.
Much depends on whether either political party manages to win both the presidency and a majority in Congress and thereby secure a mandate to implement the new policies or programs that they propose. This raises the prospect that economic policy uncertainty may knock the US economic recovery off course, at least for a period. This would likely impact the near-term economic outlook, job growth and the trajectory for interest rates. In turn, this could have implications for both net operating income and asset pricing in real estate.
On the other hand, a split ticket would mean that current policies are likely largely to continue. At present, financial markets appear to be factoring in a high probability that a split ticket will emerge.
Changes in US policies, particularly those relating to global trade, have the potential to impact economies and real estate markets throughout the world. Should global trade be inhibited by new policies, global economic growth might be expected to be lower and export-led economies affected. This would weaken real estate demand, particularly in those sectors catering to exporters, such as logistics, industrial and offices. The impact might be expected to be greatest in places like Hong Kong and Singapore — which are small, open, export-oriented economies — but if the impact on trade is significant, there would likely be consequences in most major cities.
What changes to portfolio positioning are you making, if any, in anticipation of the election?
Bellman: We do not expect to change our general approach to real estate investing in the United States or elsewhere. Our focus continues to be on real estate fundamentals: Identifying sectors, markets and/or assets that we believe have the potential to deliver sustainable outperformance.
At this advanced stage in the economic and real estate cycle, we have already taken steps to position our US real estate portfolios in preparedness for potentially more difficult times, should they emerge. The heightened economic policy uncertainty as a result of the election merely reinforces this approach, so any changes are really only at the margin.
We focus on real estate assets that we believe should generate durable income. We favor buildings leased to tenants with a strong covenant in industry sectors that are less reliant on economic cycles. We are committed to adaptable buildings in quality locations. We look for locations that may have unrealized value by identifying major infrastructure projects in their early and mid-stages of development. We generally maintain low levels of debt on our direct real estate investments — unsecured, where possible, and generally with long duration — and generally favor REIT investments with lower levels of leverage.
Everett: Trade and free markets remain paramount in our minds as global investors. Key structural risks to selected emerging market companies, as well as companies and countries that derive significant revenues from overseas, deserve extra caution. While significant trade barriers appear unlikely from either presidential candidate or Congress, investors despise uncertainty; therefore, altering, or even reviewing, existing trade pacts would unnerve investors. Consider that the average company in Switzerland, the Netherlands and Sweden garners over 80% of revenues from outside the home market. Conversely, while emerging markets may seem more vulnerable to protectionism, the average corporation in China, Turkey, the Philippines and Indonesia garners only 10% of revenues from outside the home market.4
Even with impending election risks, we need to keep in mind that changes to company business models and prospects occur regularly even in non-election years. Significant disruptive issues in the health care, financial services and energy industries (such as the Affordable Care Act, Dodd-Frank related issues and the Environmental Protection Agency’s Clean Power Plan) have influenced investor outcomes even without a presidential election or shift in Congress over the past two years.
Of the various issues that candidates are debating, which are you watching most closely, and why?
Everett: While implementation and timing remain hard to predict given the important variable of Congress’s makeup post-election, the two critical short- and long-term policies in my mind remain taxation and infrastructure.
Infrastructure investment could encompass Trump’s figurative, literal or technological wall across the United States’ southern border to help enforce security and safety for the nation (despite rhetoric about Mexico paying for it). As for tax reform, it could unleash increased investment and jobs for America and potentially even reduce international anxiety of the sort that we recently witnessed in the feud (and fine) among Ireland, the European Union, Apple and the United States regarding whether Apple’s tax payment to Ireland would be deductible on its US taxes. Both policies merit very close attention.
As has been frequently noted in this unusual election season, the two major party candidates have inverted many traditional positions of their parties, which has fueled further election uncertainty. In my view, investors with strong fundamental research processes such as Invesco should be able to capture mispriced investment opportunities emanating from election volatility for their clients.
Bellman: All policies are relevant at some level. But in relation to the real estate impact in the US, perhaps three stand out:
- Infrastructure: As investors in real assets, we find the candidates’ proposals to increase investment in infrastructure to be one of the most interesting topics. It is one of the few areas of policy in which there appears to be a broad consensus. If infrastructure investments are, in fact, increased, the manner in which they are implemented should create opportunities both for infrastructure investors directly but also indirectly for real estate investors as some buildings/locations will become more competitive as they become more accessible. We plan to monitor these changes very closely.
- Immigration: Parts of the US construction industry rely on immigrant labor. Changes to immigration or income policies might trigger labor shortages and higher wages — and hence higher construction costs. We are mindful of this risk in the development projects we have invested in and seek to mitigate it where possible. Conversely, should higher construction costs reduce the overall scale of new supply, this might have a positive impact on the outlook for occupancy and rents in already-completed buildings.
- Trade: Should trade volumes fall as a result of a more restrictive approach to trade policies, there may be a differential impact on North American industrial/logistics real estate markets for example. The outlook may be less positive than previously for assets in major port markets that have been in strong demand and performed well for a number of years.
1 Source: Bloomberg, L.P., April 2016
2 Source: US Economy Notes, Credit Suisse, Sept. 7, 2016
3 Source: Credit Suisse, Sept. 7, 2016
4 Source: Invesco (Factset), Oct. 20, 2016
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Where Jeff Everett and Timothy Bellman have expressed opinions, they are based on current market conditions as of Oct. 25, 2016, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Unless otherwise specified, data was supplied by Invesco. Past performance is not a guarantee of future returns. An investment cannot be made in an index.
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The US election: Which issues are our investors watching? by Invesco