Bye, Don to Biden: the US credit outlook

Markets have generally reacted favourably as the curtain closes on the dramatic events of the US election. Nevertheless, with Joe Biden winning the White House and the likelihood of split Congress,[1] the resulting gridlock is likely to limit the ability of either side to effect major change.

But this could have some potential benefits for investors: in particular, a split Congress could limit Biden’s ability to raise corporate taxes, which is positive across all market sectors. Another implication of the gridlock is uncertainty around if and when another stimulus package will be passed.

Implications for US credit investors

Healthcare has been at the top of the agenda this year. A split Congress lowers the potential for major changes in the sector, which is a material positive for managed-care providers in particular. Any changes made to the Affordable Care Act or the broader industry should be much less disruptive than under a more dominant Democrat regime. The potential for material policy changes in pharmaceuticals is much lower with a Republican Senate, but there are still uncertainties around drug price reform and whether Biden will use an executive order to accomplish the goals outlined in his healthcare plan.

For the energy sector, we think Biden is likely to focus on the tasks he can accomplish through the use of executive orders, such as prohibiting new permits for drilling on federal land. Longer term, we expect policymakers to become more focused on environmental issues, potentially at the expense of “business friendly” policies. All of these factors are likely to make securing project approvals and doing business in the energy sector more difficult.

In terms of financials and the banking sector, we believe that increased oversight and a retraction of the Trump administration’s deregulation is probably off the table, which in our view should be positive for the sector.

The ‘tech titans’ have hit the headlines this year, steaming ahead in the market recovery. We expect competition in the sector to remain under scrutiny, although we think it unlikely that significant action will be taken. If relations with China were to improve and tariffs were removed, this would be of further benefit to the sector.

Looking at the autos sector, we think there is potential for stricter standards to be implemented by the US Environmental Protection Agency, although in our view the impact would probably be limited, given the advancements already being made by manufacturers and suppliers in the electric-vehicles segment.

And finally, we expect very little impact in the utilities sector in the near term. Environmental, social and governance (ESG) factors will remain in focus and we would anticipate that growth in renewable energy alongside a corresponding decline in coal would be a feature of the Biden presidency. 

Ring out the old, ring in the new

We’ll be keeping a close eye on developments through the end of 2020 and into the New Year. Despite the latent risks on the horizon and the uncertainties that remain in the political sphere, we believe there will still be a broad range of opportunities to be found in US credit.

[1] Regarding the probability of a split Congress, the Georgia runoff elections will take place on 5 January 2021 and there is no guarantee that the Republicans will win. We currently believe the Republican party will hold the majority based on past results and polling.