In the remaining weeks before Election Day, former Vice President Biden continues to lead in most polls. But the polls have often proven unreliable, as the last election cycle demonstrated so clearly. For our part, we view the Presidential race as more of a “toss-up.” In down-ballot elections it seems likely that the Democrats will continue to control the House of Representatives while the Senate has moved from leaning Republican to being a much closer calls. Whatever the outcome, and whatever your political leanings, we recommend that investors elect to add resiliency to their portfolios in the coming months, since new opportunities (and our old friend volatility) may start to appear.
In looking at the potential impact of the election on investors and the economy we consider three broad policy areas of policy: taxes, regulation, and fiscal stimulus.
Should the Democrats sweep, we expect to see major shifts on all fronts. Taxes are likely to rise across multiple areas including income, estate, and corporate. New taxes may be introduced on wealth and financial transactions. The so-called “carried interest” deduction will probably be a thing of the past. The regulatory environment may become more restrictive, with new regulations placed on financial markets, among others.
While these initiatives, if realized, will likely weigh on economic growth, at least in the short term, they are likely to be counter-balanced by more aggressive Democratic fiscal policy. This might include more and longer support for the economy, new social spending, a higher minimum wage, relief for cities and states, and some form of student loan forgiveness. Collectively, this could add trillions of dollars in new stimulus and put substantial new disposable income in the pockets of consumers, which could be a major boon for the economy.
Additionally, there’s healthcare, a complex, emotionally charged segment of our economy that has historically been resistant to quick fixes. Should the Democrats prevail – and especially if they capture all three branches of government – we would expect to see movement towards a single-payer system, with enthusiastic support from the Bernie Sanders wing of the party.
Should the Democrats sweep, we expect to see major shifts on all fronts. Taxes are likely to rise across multiple areas including income, estate, and corporate.
Assuming consumers continue to pressure companies for change – and favor those brands they believe to be most closely aligned with their values – the momentum behind ESG investing will continue to grow.
The U.S. has a lot of room to run in this regard. In Europe, ESG strategies pulled in a record $132 billion in new assets in 2019. In the U.S., mutual funds and ETFs focused on sustainability saw just over $20 billion in new flows during the same period. But investor interest has been growing and that $20 billion was four times the flows from the year before. Around the world, the percentage of both retail and institutional investors that apply environmental, social, and governance (ESG) principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019, according to a study from Deloitte released earlier this year.
Which is not to say there aren’t challenges. As ESG investing has accelerated, regulatory scrutiny has picked up as well. In the US, regulations have been proposed that would require those institutional investors subject to Employee Retirement Income Security Act (ERISA), like pension funds, to demonstrate that ESG investing supports the long-term appreciation of plan assets. In other words, to show that return is not being sacrificed by adhering to ESG principles.
The reality is that ESG factors can have an impact on corporate returns, as regulators like the Department of Labor have acknowledged. Policies with regards to diversity, global warming and sustainability can present material business risks through regulatory action, litigation, loss of consumer confidence, reputational damage, and brand erosion, all potential consequences that can ultimately translate into negative market performance. But it is not enough for companies to simply point to their historic policies and concerns and expect the world to move on. People are demanding updates, answers and specifics from brands in ways never seen before, which certainly presents new business challenges but also tremendous opportunities. Viewed through this lens, the adoption of specific, actionable ESG policies can in fact confer a competitive advantage. As we noted in our last blog, embracing ESG can simply be good business.
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