US elections could impact on the investment outcomes South African investors experience

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By Adriaan Pask* 

The drawn-out US election process and associated melodrama are often viewed chiefly as sources of amusement by South Africans. However, who becomes the leader of the most powerful nation in the world can have a fundamental impact on everything from foreign policy to trade for most countries, South Africa included.

Adriaan Pask

While election surprises can never be discounted and polls have sometimes been wrong, Biden’s consistent lead this time around might well mean we could see a change in leadership at the top. Potentially, there may even be the possibility of a so-called “clean sweep” by Democrats, with the party having a clear majority in both the Senate and the House, and also holding the presidency. Policy implementation is always easier if the ruling party enjoys a clear majority in both houses, while it becomes trickier when one party controls the House, and the other the Senate.

Intricacies of the US election aside, why should South African investors care about the election outcome? If we have learned anything since the 2016 election upset, it has certainly been that the views of the ruling US president can have a large impact on everything from the value of the US dollar to the behaviour of capital markets. There can be little doubt that talk of trade wars has bolstered the US dollar while hurting the prospects of especially emerging market currencies, the rand among them. US markets have also benefited from a bull run, and while there are a variety of reasons for this, Trump’s “America first” and pro-business tax policies have certainly contributed to sustaining the longest bull run in history, until Covid-19 disrupted the trend.

So, what would a Biden win entail, and how could foreign policy shift as a result? We anticipate that Biden is likely to roll back a number of changes implemented under the Trump administration, especially if a “clean sweep” allows them to do so. These could include changes that were made in the energy and healthcare sectors, and potentially also a rise in corporate taxes, although not to previous levels. We could also see changes in the way the US approaches foreign relations, with the US rejoining the Paris agreement and potentially smoother relations with global bodies like the World Trade Organisation and World Health Organisation.

PSG recently hosted well-respected international economist Larry Hatheway to unpack the impact of the US elections as part of our Think Big webinar series. During this session, Hatheway remarked that while it is true that the American stock market has fared well under the Trump administration, stock market performance benefits only a small sliver of the population. Equality is increasingly an issue around the globe, and the US is no exception. Therefore, giving up some potential stock market return in favour of extending unemployment or social benefits to help ordinary citizens and ensuring greater equality in the process, could be a politically astute move for Biden, should he be elected.

And then of course, there are the bigger macro trends to consider. US markets have fared extremely well, and supportive monetary policy and stimulus measures continue to support them and inflate asset prices, despite the uncertain economic outlook. However, this also increases the risks of things changing or turning out differently than expected, which could impact materially on the future return investors earn. Similarly, the rand has taken a beating for a variety of reasons, and while concerns around the country’s fiscal position are valid, we should not overlook the dollar’s strength as a contributor to the currency’s weakness. A change in the fortune of the dollar could therefore also strengthen the rand and reverse some of the recent weakness we have seen.

The US election could bring about many changes that are likely to impact on asset markets and even currencies. Offshore investment should always be part of an overall financial plan, and ensuring your investment portfolio is appropriately balanced is key. A qualified financial adviser can help to ensure your risks have not become overly concentrated in light of the market movements of the past five years.

PSG is hosting a second Think Big discussion with Larry Hatheway to unpack the impact of the US election once the results are known. Click here to register for the session.

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  • Adriaan Pask is the Chief Investment Officer at PSG Wealth.