America's Political Landscape Goes Blue: Wealth Managers React

Jackie Bennion, Deputy Editor, 8 January 2021


Wealth and estates
Looking at how the new majority affects taxing the wealthy and their estate planning strategies, Jim Bertles, managing director of Tiedemann Advisors, in Palm Beach, Florida, said that high net worth individuals can expect to see major changes.

“With a Democrat majority in the Senate, there is a strong chance that gift, estate and generation-skipping taxes will increase, while exemptions will decrease. Additionally, some prior proposals restricting the benefits of some estate planning strategies such as GRATs, family discounts and potentially grantor trusts may gain traction. The biggest question is when these changes will come. Some think 1 January 2021, some think mid-year and a growing group think 1 January 2022. We expect to see another rush of planning before then – similar to what we saw ahead of the presidential election,” Bertles said.

Mohammed Kazmi, portfolio manager for UBP’s absolute fixed Income team, believes that Democrat control will boost confidence that the recovery will continue in 2021.

“The vaccine rollout as well as now increased fiscal support should mean that any slowdown in Q1 growth will be a temporary blip, rather than anything more permanent or sustained. We have positioned as such, holding curve steepeners and short duration views in our absolute return funds as we anticipate that such reflation trades have further legs in the near term as the vaccine rollout and fiscal support will take us closer to a normalisation in activities as the year progresses."

Bad news for bonds?
As far as how results affect bonds, Eric Vanraes, portfolio manager at Eric Sturdza Investments said: “A 100 per cent Democrat victory (and unified control of Congress and the House) means that the “leftist” part of Joe Biden’s programme could eventually be implemented. This is bad news for bonds, but nothing has really changed since 4 November when we knew that a huge blue wave at the Senate was unlikely.

"Biden will most likely implement a centrist policy (probably slightly more “leftist” than Clinton and Obama) and, although the bond market’s reaction is understandable, it seems a bit exaggerated. The most important factor, we believe, is the behaviour of the Fed and the beginning of a kind of cooperation between Chair Powell and Janet Yellen (Secretary of Treasury), with the aim of restoring inflation."

Investment strategist at Brooks Macdonald, Matthew Cady, said the Georgia results might be a double-edged sword for markets.

“On the one hand, it could make an additional and larger fiscal stimulus in Q1 more of a possibility and with it a greater emphasis on infrastructure spending, which will provide greater support for markets as the US continues to face headwinds from the COVID-19 pandemic. On the other hand, further out it could also raise the chances of tax rises, tougher regulation and other less market-positive reforms,” he said.

Cady also argued that the pandemic will continue to dominate political priorities, and tax rises unlikely while the US economy is still being judged in recovery mode. There is also the US political cycle to consider. “Mid-term elections are less than 2 years away in November 2022, and the Democrats will be wary of risking unpopular policy changes for fear of losing control of the Senate especially should they have just won it,” he said.

Investment implications
“The new Congressional composition only furthers my argument that cyclical, value and small cap stocks should outperform in 2021 due to both a valuation catch-up and a greater fiscal stimulus in the year,” Inveso’s global market strategist for Asia, David Chao, said. “Technology stocks could underperform in the near-term due to a perceived higher corporate tax rate and stricter regulation.

“The most likely priorities will be an additional round of stimulus to help out states and municipalities - which were left out in the most recent economic aid package - and increasing the direct payment to $2,000 per person and extending unemployment benefits."

Dollar fortunes
Another area to watch is the US dollar, said James Athey, investment director at Aberdeen Standard Investments: “Shorting the Greenback is one of the market’s biggest consensus trades for 2021. A positive US-specific growth boost coupled with rising US yields isn’t normally a combination we would expect to see driving the currency lower.

"Should the dollar do an about-face it will provide some welcome relief to the world’s exporters but it might not be so welcome in financial markets which often associate a rising dollar with periods of risk off. That association is very often a self-fulfilling prophecy.”

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