Infocus - Sector playbook ahead of the US Presidential election

Election years usually come with increased equity market volatility, particularly in the last quarter of the year. Investors are understandably eager to position themselves for different scenarios ahead of the election and the expected increase in uncertainty. In this InFocus, Economist Joaquin Thul reviews the sectors that could benefit in the event of a Trump or Harris win.

US election polls currently show the race for the White House is very close, particularly in the swing states that determine the outcome. Since becoming the Democratic Party candidate, Kamala Harris has closed and now opened up a poll lead over Donald Trump nationally (see Figure 1). Trump is marginally ahead in all but one of the swing states¹ (see Figure 2) but the margin of error in such polls is, of course, always wide. In the absence of written manifestos, voters must rely on information gathered from a variety of media sources to ascertain what are the main policies of each candidate. A summary of the main policies supported by Harris and Trump is presented in the Appendix. It is important to stress that:

• Although we can summarise and contrast both candidates’ proposals, the enactment of most of these policies will be highly dependent on who controls the Senate and the House of Representatives. The more Congress is divided, the less opportunity there will be for bipartisan legislation;
• The US Constitution allows the President to decide on issues related to trade and military actions, without requiring approval from Congress. Issues related to taxation, public finances and civil rights need approval, which might not be easy to achieve if majorities are small or if Congress is split;
• From a financial market perspective, a Red or Blue “sweep” of the White House and both houses of Congress could potentially be the most disruptive scenario. This would make it easier for the controlling party to pass some of the more controversial proposed policies.

^{Box colours (Red: Republican, Blue: Democrat) denote winner (2020) or poll lead in July/October 2024.}

^{Numbers in brackets show number of electoral college votes in each state.}

^{Source: RealClearPolitics, LSEG Data & Analytics and EFGAM. Data as at 15 October 2024.}

Continuation of Biden’s policies under Harris

Harris is running as a continuity candidate. This means that despite a few differences on specific issues, it would be expected that a Harris presidency would pursue many of the same policies supported by the current government, of which Harris is the Vice President. From an economic policy stance, it would be reasonable to expect the persistence of existing policies on trade. Strong protectionist policies on materially sensitive sectors and a focus on bringing back some industrial production to the US or to countries close to the US (nearshoring) would be expected.

Fiscal policy would remain similar under Harris, requiring a decision on tax breaks that expire in 2025 and a renegotiation of the debt ceiling by the end of next year. However, the Inflation Reduction Act (IRA) and the Affordable Care Act (ACA) would remain in place, both of which are important for the energy and healthcare sectors. On the latter, a strong emphasis will be placed on imposing a cap on drug costs for older citizens with a focus on making coverage more affordable.

On the regulatory front, Harris is expected to maintain an aggressive stance on antitrust enforcement law. A Democrat administration would likely retain similar policies to Biden on immigration, with open channels for legal migration, but a tough stance on asylum seekers.

The main differences between Harris and Biden are in terms of foreign policy. Harris is unlikely to maintain the same level of support for Israel as Biden. She would be expected to set limits on how Israel can use some of US military aid to prevent a further escalation of the conflict. However, not much change would be expected on the US stance on Ukraine, China and NATO.

Policies under Trump 2.0

A victory for Donald Trump would be more disruptive. The threat of tariffs will increase as would the possibility of retaliation against countries that do not align with Trump’s views of the world. Trump has hinted of his intention to impose a 10% tariff on all imports, with some small exceptions, for example, for Mexico and Canada. Additionally, Trump has threatened to impose a 60% tariff on all US imports from China.

The two big tariffs of the first Trump presidency were implemented without Congressional approval.² Those on steel and aluminium were imposed on the grounds of a threat to national security, while the tariffs applied specifically to China were implemented as a retaliatory measure for breach of an existing trade agreement. The use of these legal loopholes to avoid Congress was an effective tool. There does not appear to be anything that would prevent Trump from enforcing similar principles once again as a means of implementing tariffs on other countries, even though they would be expected to damage US economic prospects. For example, a study from the Tax Foundation found these policies could have a negative impact of 1.1% on US GDP and threaten over 800,000 jobs.³

With regards to economic policy, a Trump administration would be expected to repeal the IRA, cutting tax credits for the energy industry and reducing incentives for green energy projects. Trump would be expected to cap federal funding on Medicaid and replace the ACA with block grants to individual states.

On immigration, Trump has been explicit on the need to have tighter migrant controls, increasing funding for border protection and tougher restrictions on legal labour migration. He intends to pursue an agenda to reduce regulation across the Federal Trade Commission (FTC), the Federal Communications Commission (FCC) and Securities and Exchange Commission (SEC).

Sector implications

Based on what we have been able to establish from multiple sources, we have put together a summary of sectors (see Figure 3 overleaf). that could potentially benefit under either a Trump or Harris administration.

It is expected that economic policy under Harris would continue the same path as the current administration. Consumers would be expected to benefit from lower inflation, higher social spending, and an increase in the minimum wage. The boost to consumers’ purchasing power would favour consumer discretionary and consumer staples sectors.

The extension of energy tax credits is expected to benefit defensive sectors such as utilities. The lower interest rate environment that would be expected to result, together with a focus on housing policies from a Harris administration would also favour real estate.

Alternatively, a victory for Donald Trump would be associated with a desire to deregulate certain sectors and impose fewer restrictions on M&A activity, something that may benefit the communication services and financials sectors.

Following the expected repeal of the IRA, a Trump administration is expected to boost US energy production to bring down fuel costs. This would be positive for the fossil fuel industry and the energy sector. Finally, lower regulation on drug pricing and lower corporate taxes for large companies – both expected to be implemented under Trump – could benefit the healthcare sector directly.

The technology sector could benefit from the support that both candidates are expected to show to the domestic semiconductor industry. Although Harris’s reduction in import tariffs and a continuation of immigration policies to attract talent into the US could be beneficial for tech firms, so would be the reduction in Corporation tax promised by Trump.

Similarly, industrials could benefit from Harris’s focus on green infrastructure projects and investment in clean energy initiatives. However, they could also benefit from more protectionist measures implemented to boost domestic production and increase construction.

Finally, the materials sector could gain from either candidate winning the election. The sector is expected to benefit from its cyclicality in the context of a return to stronger GDP growth. An extension of support for the sector, through the IRA and the Infrastructure Law, would be expected under Harris. This would favour homebuilders, metal extraction firms and miners. Under Trump, a more pro-growth agenda with higher barriers to imports would also be expected to benefit domestic firms.

Conclusion

TThe US election is too close to call, with tight polls in the swing states. Trying to anticipate which sectors would benefit in each scenario is always difficult, made even tougher due to the possibility of a split Congress, which would leave less space for bipartisan legislation.

Harris would be expected to continue some of the key economic policies of the Biden administration. A soft landing of the US economy would be expected, with lower inflation, a boost to consumers’ purchasing power, and a focus on renewable energy infrastructure.

Under Trump, the risk of higher tariffs that would increase inflationary pressures cannot be ruled out. In that context, less regulation, and taxes for the corporate sector and a tougher stance on immigration should also be expected.

However, given the broad nature of some of the policies expected to be implemented and the possibility of a split Congress, it is possible to find a narrative for most sectors, or specific sub-industries, to benefit in either political scenario.

¹The swing states are those US states in which the polls are the closest and the result could go either way.

² https://tinyurl.com/kb924k7e

³ https://tinyurl.com/48z5wss7

APPENDIX: SUMMARY TABLE

Important Information

The value of investments and the income derived from them can fall as well as rise, and past performance is no indicator of future performance. Investment products may be subject to investment risks involving, but not limited to, possible loss of all or part of the principal invested.

This document does not constitute and shall not be construed as a prospectus, advertisement, public offering or placement of, nor a recommendation to buy, sell, hold or solicit, any investment, security, other financial instrument or other product or service. It is not intended to be a final representation of the terms and conditions of any investment, security, other financial instrument or other product or service. This document is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this document does not take into account the specific investment objectives, financial situation or particular needs of the recipient. You should seek your own professional advice suitable to your particular circumstances prior to making any investment or if you are in doubt as to the information in this document.

Although information in this document has been obtained from sources believed to be reliable, no member of the EFG group represents or warrants its accuracy, and such information may be incomplete or condensed. Any opinions in this document are subject to change without notice. This document may contain personal opinions which do not necessarily reflect the position of any member of the EFG group. To the fullest extent permissible by law, no member of the EFG group shall be responsible for the consequences of any errors or omissions herein, or reliance upon any opinion or statement contained herein, and each member of the EFG group expressly disclaims any liability, including (without limitation) liability for incidental or consequential damages, arising from the same or resulting from any action or inaction on the part of the recipient in reliance on this document.
The availability of this document in any jurisdiction or country may be contrary to local law or regulation and persons who come into possession of this document should inform themselves of and observe any restrictions. This document may not be reproduced, disclosed or distributed (in whole or in part) to any other person without prior written permission from an authorised member of the EFG group.

This document has been produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.