The more things change, the more things stay the same?
President-elect Joe Biden is highly likely to preside over a split Congress.
The Senate stands at 50-48 in the Republicans’ favor, with two run-offs in Georgia set for January 5th. The only way for the Democrats to secure an effective majority is to win both – an extremely tall order, in our view – giving Vice President-elect Kamala Harris a deciding vote on any tie.
Either way, Biden’s hands will be tied. Credit markets, which often prefer a lack of change, are likely to welcome the outcome.
Breaking the implications down into six main policy outcomes, we have highlighted the likely winners and losers from a credit sector perspective (Table 1).
Table 1: Credit sector winners and losers of a Congress divided1
|Lack of feared tax hikes||
|Less fiscal stimulus than hoped||
Consumer-facing sectors (e.g. retail)
|Potential infrastructure public spend||
|Pivot to climate policy||Clean energy||
Oil and gas
|Less hawkish foreign policy||
|Firms competing with Chinese imports|
Cold water on Biden's fiscal ambitions and proposed tax hikes
A Republican Senate essentially takes a partial reversal of the ‘Trump tax cuts’ off-the-table. A 50:50 Senate would, at best postpone them to 2022 in our view.
Without a supermajority in the Senate, Biden cannot pass budgetary legislation (a result of the infamous ‘filibuster’), unless ‘reconciliation’ is invoked – which takes time and has unique restrictions.
As such, we believe the telecommunications, banking and technology (which had underperformed in anticipation of tax reform) will be the main winners.
By a similar token, Biden’s stimulus and infrastructure ambitions will likely be watered down from ~$2trn to ~$1trn over ten years in our view – a negative for consumption and corporate revenues.
Biden's 'de-deregulation' push may not be all bad for credit
Biden will clearly look to reverse the Trump administration’s deregulation efforts, particularly where he won’t need Congressional approval.
Climate change will be a clear focus – meaning tougher greenhouse gas rules for US utilities and efficiency requirements for the autos sector. The wider oil and gas sector will likely be resilient for some time, as efforts to curtail new fracking activity on federal lands will likely take until 2023 to make an impact.
Elsewhere, Democrats have some common ground with Republicans – meaning bipartisan reforms around social media, tech and pharmaceuticals are possible. However, given substantial disagreement across the aisle on specifics, compromise and less ambitious outcomes seem likely.
Regulation, in some cases, could benefit credit investors at the expense of shareholders. To name two examples, higher capital requirements will strengthen the credit worthiness of the banking sector and greater antitrust scrutiny can marginally discourages leverage-inducing M&A activity.
No more trade wars?
A Biden presidency will likely spell the end of the ‘Trump trade wars’, although he’s unlikely to materially roll back existing tariffs – particularly as America’s geopolitical rivalry with China intensifies (see our paper on The Future of Globalization).
Nonetheless, a further escalation of trade tensions is unlikely, a boon for large importers such as tech and durable goods producers. It’s a negative for firms that compete with Chinese imports, and therefore mixed for manufacturing overall.
The Fed will stay in the spotlight
A lack of ‘game-changing’ fiscal reforms will keep the spotlight on the Fed to keep managing the economic recovery through low rates and QE.
Importantly for credit, the one area of firepower that the Fed has left is in corporate purchases, a program it only used to 10% capacity earlier this year. A downturn could imply a direct Fed ‘put’ for the credit markets. Although Treasury Secretary Steven Mnuchin recently chose not to renew the Fed’s corporate credit purchases for 2021, Biden’s Treasury Secretary can overturn that decision with the stroke of a pen.
Credit looks well-placed for the Biden era
Ultimately, fixed income markets are often comfortable with a lack of political change, as they imply continuity and less political uncertainty.
The economy and economic earnings have quietly continued their road to recovery. Encouraging news on at least three COVID-19 vaccines also indicate that the conversation around rollouts, efficacy and the extent to which economies can re-open.
In our view, the lack of potential surprises is encouraging for investment grade credit and select high yield credit – both in the near term, and over the course of the next political administration.