NEWS + VIEWS – 18/10/2024
MARKETS
Share markets have continued their grind upward on the back of falling interest rates and stimulus from China.
Domestically, the share market does not look cheap and according to Macquarie Bank’s modelling, it is trading at around 19 times on a 12-month forward Price/Earnings ratio. This compares to a longer-term average of around 15 times.
October on average is one of the poorest performing months, albeit positive. This month to date has been good for investors on the back of lower interest rate expectations. October in the past has had a bad rap due to major downturns (e.g. 1987). Volatility can be higher, but pullbacks are often followed by a rapid rebound.
Source: Livewire
THE IMPACT OF THE US ELECTION ON INVESTORS
The US is the world’s largest economy accounting for around 26% of global GDP. Geopolitically, it is the cornerstone of Western security. Consequently, what happens in the US has a significant impact on other countries and economies.
Despite the US’ outsized influence, election results and the winning party’s policies have not necessarily had huge impact on share markets, at least not in the short term. It takes time to enact policies (if enacted at all) and business activity adapts to them.
Monetary policy or interest rates tend to have shorter term influences, as demonstrated by positive share market moves since US interest rates began easing. In fact, markets tend to react on expectations 12 months in advance.
The US election will be held on the 5th of November and polls are predicting a very tight result. Either party would need to win both the Congress and the White House to enact all its proposed policies (and those it hasn’t yet announced). A split result would mean less change.
Invesco recently provided some analysis on policies of each party that may have an impact on different sectors of the US economy. We review those policy areas that are likely to have some effect on Australian companies and investors.
TRADE AND INVESTMENT
Democrats
Semiconductors, renewable energy, artificial intelligence and related manufacturing/construction companies would continue to benefit from existing subsidies and policies. There will be minimal impact for Australian companies although there are some companies seeking US subsidies for renewable energy projects.
Republicans
A universal tariff of 10% on all imports, 60% on goods from China and 100% on cars will assist US steel, aluminium and paper. Australian exports to the US are not large although some farm products such as beef would be impacted. Experience in 2018 suggests that share market volatility will spike if the tariffs are enacted.
ENERGY
Democrats
Renewable energy, electric vehicle, manufacturing (solar and battery) and construction companies would benefit. Interestingly, LNG companies have prospered under the Democrats but that has been partly due to the impact of the Russian invasion of Ukraine.
Republicans
Removing renewable energy incentives would negatively affect those industries. Also removing impediments to oil and gas drilling and related exports would probably mean lower oil prices. Energy exporters in Australia would be negatively impacted by lower prices.
HEALTH CARE
Democrats
Medicare price negotiations for prescription drugs would continue, which may be a negative for prices achieved by pharmaceutical companies such as CSL.
Republicans
Less regulation may be favourable for pharmaceutical companies and other health care providers.
HOUSING
Both parties have policies aimed at boosting housing stocks. Companies such as James Hardie Industries (JHX) would benefit. Labour shortages might be exacerbated if Republican policies reduce immigration.
TAX POLICY
Democrats
Higher personal and company taxes would likely discourage companies locating operations in the US.
Republicans
Lower tax rates for US based producers would encourage companies to locate in the US. Australian resources companies in particular have been focussing investment offshore including the US, as Australian industrial relations and environmental laws are making investment here more difficult. This could be accelerated under these policies.
DEBT AND DEFICITS
Unfortunately, neither party has a focus on debt and deficits, which will eventually mean higher interest rates as the US will need to fund ongoing deficits (and debt).
In summary, history suggests that impacts on investment markets will not be marked or long lasting. However, negatives from longer term issues such as debt, deficits and tariffs will eventually flow through to economic activity.
Gerard O’Shaughnessy
P 0423 771 330
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