US election special: which investment themes win at the polls?

The upcoming US election could be one of the most momentous in recent history with potentially far-reaching global implications. With that in mind, we have been working closely with our global industry analysts (GIAs) and other experts to chart the potential impact of the election result on our 14 global investment themes, which span a wide range of sectors and industries and touch many regions. As a thematic team, we believe close collaboration with our GIAs helps us identify the most attractive companies within each theme, by aligning our strong top-down views with their deep bottom-up insights.

Perhaps surprisingly, one of the most consistent responses we received was that our GIAs did not see the election as a material event. However, there are some themes which have the potential to be impacted negatively by the election result, suggesting that it may be worth tracking risk factors in the run-up to November. Below we summarise potential considerations for each theme under different election outcomes with perspectives from some of our leading GIAs and portfolio managers.

Next-generation energy and vehicles: Trump victory less of a game changer than rhetoric suggests?

One of the key policy areas that Macro Strategist Juhi Dhawan is watching in the run-up to the election is tax and spending shifts. On the spending side, Juhi highlights the potential impact on Biden’s 2022 Inflation Reduction Act (IRA), which included the largest investment in climate and energy in US history. As Juhi says, Trump is of course far less interested in green energy subsidies, so if he wins, we could see subsidies curtailed in both the time period over which they are offered and the breadth of green energy sources that receive them. How much and how far is a function of Congress and whether Trump, should he win, also secures a sweep in Congress to push through such changes. Industrial company and green company earnings in the US have received a large boost from these subsidies and under a Harris administration would see a still-strong path ahead.

With a high percentage of projects announced under the IRA still in the planning stage, it is conceivable that some will be cancelled or delayed until election clarity emerges. In the event of a Republican sweep, Equity Research Analyst David Katter expects a partial IRA repeal as a fiscal offset for a tax-cut extension bill but does not believe a full repeal is likely. One reason for this is that a disproportionate share of IRA-related investment is directed to red states and districts, which in David’s view is likely to protect the IRA’s key provisions. Scrutiny will probably be focused instead on electric vehicles (EVs), EV charging and batteries, creating volatility for the sector but also potentially creating buying opportunities. Elon Musk’s very public endorsement of Trump — at the time of writing — has added further complexity to understanding what a second term in power from Trump would mean for the EV industry. As Portfolio Manager Keith White observes, fear around what Trump will do to the IRA is likely to be much greater than the reality.

This was a sentiment somewhat echoed by Portfolio Manager Alan Hsu, who has followed climate regulation and policy for nearly two decades, and went as far as to say that general elections and election outcomes are a red herring, with the presidential outcome tending either ”to get slowly discounted and then reverse or ultimately not matter”. Under Republicans, looser rules around emissions could lead to delayed investments into green capex. However, this could be more than offset by increased capex around infrastructure, resilience and reshoring. Ultimately, unit economics and fundamentals play a bigger role, according to Alan.

Health care inclusion: a reasonably narrow set of outcomes?

According to Wellington’s health care inclusion team, as in prior election years, the 2024 US presidential and congressional elections will likely contribute to heightened volatility in health care markets given the historical relationship between politics and health care policy. That said, the team believes that the range of outcomes is narrower in the current election cycle compared to prior election cycles. This is in part because Trump has been president before, giving us a track record on his approach to health care, while Harris is more likely to continue the policies of her predecessor. Furthermore, as it stands today, health care is a lower-priority voter concern, though an important part of cost-of-living concerns, which reduces the likelihood of large policy or major structural changes in the health care system. As a result, this should create a more predictable environment that can enable companies across health care subsectors to execute.

All that said, the health care inclusion team does see some relative winners and losers across the health care industry. The team believes there are bipartisan health care priorities that should continue regardless of the election outcome. These include advancing value-based care initiatives, expanding access to behavioural health care, pharmacy benefit manager (PBM) reform and drug pricing scrutiny.

Under a Democratic sweep scenario, Kamala Harris may propose expanding the annual number of Medicare drugs subject to negotiation and, if passed, this could impact the earnings profile of the biopharma industry. In addition, the health care inclusion team would expect companies exposed to Medicaid and healthcare exchanges to continue to experience a favourable political backdrop with regard to funding and subsidies. Medicare Advantage is more likely to face continued headwinds, albeit manageable.

Under a divided government with Harris as president, the team expects existing drug pricing legislation to remain intact with minimal changes.

Under a divided government with Trump as president or a Republican sweep scenario, the focus on drug pricing may be more limited. On the other hand, repealing the IRA under a Republican sweep scenario is also unlikely due to significant federal spending requirements.

Strategic security: more consequential differences?

Regardless of November’s result and the differing policy priorities of Vice President Harris and former President Trump, Geopolitical Strategist Thomas Mucha believes that the global geopolitical environment will remain challenged — likely for years to come. In such an uncertain security environment, US leaders and other policymakers across the world will continue to emphasise national security, often at the expense of economic efficiency.

A greater focus on national security should lead to more “protection and promotion” of strategic sectors via policy measures, targeted export controls and legislative actions. Global supply chains will also be disrupted as governments encourage businesses to “friendshore” with allies rather than risk being reliant on rivals. Strategic sectors that could be a focus for policymakers include next-generation technology, such as semiconductor technologies and biotech.

Thomas sees Vice President Kamala Harris’s position on foreign policy as closely aligned to that of President Biden. This means a continuing focus on strategic sector protection and promotion in industries critical to great-power competition with China, including AI, critical minerals and biotech.

Foreign policy under Trump would likely mirror the transactional approach of his first administration. Trade, too, would likely shape US foreign policy in a second Trump administration. The former president’s promise to levy significant trade tariffs on China — as well as on some US allies across Europe and the Indo-Pacific — would likely be a key feature of a Trump 2.0’s approach to the world and one almost certain to add new tensions to both US/China relations and new frictions with traditional US allies.

Whether Republicans or Democrats win at the polls, Global Industry Analyst Claude Staehly sees the defence budget remaining well supported but with a different spending mix. Republicans have traditionally favoured big-ticket items and/or futuristic warfare (think 1983 Reagan’s Strategic Defense Initiative, christened “Star Wars” by the media, or President Trump’s creation of the US Space Force in 2019) as opposed to the Democrats’ emphasis on operations and maintenance and current ground conflicts. Globally, Claude expects continued pressure on non-US NATO countries to increase their defence spending and sees non-US defence spending continuing to increase regardless of the outcome of the US election. The chart below, from NATO, shows accelerating spending in defence, with 23 NATO countries now expected to be compliant with the 2% of GDP guideline compared with only 6 in 2021.

Figure 1