Monthly Market Outlook

Fireworks on 4 July or 5 November?

June 2024 (Click here to download)

The Fourth of July is America’s Independence Day and, this year ,it’s also the day British voters will go to the polls to elect the next government. Americans, meanwhile, will vote in a presidential election on 5 November (the UK’s Guy Fawkes Night), and we expect fireworks as US voters choose between two candidates with polar opposite views.

Part of the Manager’s investment approach is analysing what different political parties’ policies might mean for economies, markets and, by extension, investors. It notes that the US election, in particular, could have implications for its clients’ portfolios.

The Reform UK party’s Nigel Farage said in a recent speech in Dover that “the American election is more important” than the UK general election. The Manager is inclined to agree that the US election will be the one to watch. That’s because tax and spending policies, which matter most for global markets, could look very different depending on whether Biden or Trump wins the race to the White House.

In contrast, the spending policies the Manager expects from the two major parties in the UK are likely to be quite similar. Both the Labour and Conservative parties are committed to the UK’s fiscal rule, which requires government debt to be falling as a share of national income between the fourth and fifth years of forecasts. This will make it harder for a new government to make any major changes to key tax and spending policies.

The UK financial market’s muted reaction to Rishi Sunak’s election announcement tallies with the Manager’s view that what’s happening in the US will have a greater impact on investments.

Below the Manager has summarised some of the key policies it would expect to see from the two major UK parties which could affect financial markets. Note that this is the Manager’s interpretation rather than fact, as there is typically a large gap between what is promised on the campaign trail and what is actually enacted.

This table was created based on information available on 29 May 2024.

UK policy comparison and market impact

Source: WTW

Who will win the US presidency?

If polls and betting odds are to be believed, Trump is set to win the presidency, although not by a large margin. However, we must treat the polls with caution this far out, not because they are inherently inaccurate, but because a lot can change within six months. Voters could be put off by the outcome of Trump’s trial which made him the first ex-US president to have a criminal conviction.

Trump may prioritise cutting taxes for corporations and wealthy individuals while keeping public spending unchanged. He may repeal some parts of Biden’s Inflation Reduction Act. He has also previously spoken about wanting to reduce waste in Medicaid and Social Security without reducing entitlements, so long-term spending pressures remain. He would probably increase trade tariffs across the board, particularly on Chinese goods. Imports from Mexico and the EU may also be in his sights.

Biden may want to increase some taxes, such as by leaving personal tax cuts from Trump’s presidency to expire in 2025, and continue spending. He is likely to be selectively interventionist with regard to China trade – for instance, he recently quadrupled border taxes on electric vehicles from China with the aim of protecting US jobs.

This table below was created based on information available on 29 May 2024.

US presidential candidate policy differences – how big are they?

*These are items hard to shift without a workable congressional majority
Source: WTW

What market impact could we see? 

We don’t expect the US election to be a driver of market movements until much closer to 5 November and then afterwards once policy plans become clearer. The US debt ceiling expires in 2025 and this could be a catalyst for market swings.

Uncertainty over the outcome and what each candidate will do suggests that the impact is an uptick in volatility, rather than a clear move in one direction.

Because Biden represents the status quo, the biggest change would come from a Trump White House amplified by Republican majorities in Congress.

Trump has been clear that he would prefer lower interest rates and is prepared to put pressure on the Federal Reserve (the US Central Bank) or even replace its leadership if he doesn’t get his way. The independence of the Federal Reserve is a key anchor for the economy and markets, so any instability here could hit both bond and equity prices.

Likewise, an increase in the budget deficit could cause bond prices to fall.

Equity prices, on the other hand, could rise if corporate tax cuts boost company earnings, and consumer confidence improves.

Sector in focus: Utilities 

The utilities sector has been the second weakest performing sector over the last year. Defensive sectors such as utilities and consumer staples more broadly have lagged behind the World Index, which has been lifted by investor confidence in artificial intelligence (AI) as well as increased appetite for risk. But the AI theme is now starting to benefit utilities companies too. Earnings reports for Q1 show big tech companies are spending more money on building new data centers.

These data centers will require more power and the market expects utilities stocks – particularly those in the clean energy and nuclear power subsectors – to benefit from a surge in demand.

Investors like utilities for their defensive nature and stable demand, even in weaker economic conditions. Right now, these companies also look cheap relative to history, with stock valuations close to a five-year low. Utility companies in the US have benefitted from Biden’s Inflation Reduction Act which gave $370bn in tax credits, incentives and other financing to accelerate the green energy transition.

Looking forward, weaker economic conditions and lower interest rates would make the sector more appealing. Companies in the sector tend to have high levels of debt because of their need for expensive infrastructure, so lower rates would help ease the pressure of servicing these debts. However, a stronger economic recovery scenario could lead to continued underperformance of the utilities sector compared to other sectors.

Conclusion

The Manager is always conscious of any impact the wider environment could have on it clients’ portfolios. Its strategy remains to stay diversified across a range of investments, and to use research and active management to manage risks and spot opportunities.

Source: atomos.

atomos is the trading name of Atomos Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Atomos Investments Limited is registered in England and Wales, No: 2041819. Registered office: 2nd Floor, 5 Hatfields (alto), London SE1 9PG.

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.

Past performance does not predict future returns. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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