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The impact of Covid-19 and the outlook for the US economy

05 August 2020 Schroders

Schroders’ experts preview the 2020 US presidential election

Discussing the impact of Covid-19 and the outlook for the US economy, Keith Wade, Chief Economist & Strategist, Schroders, comments:

“We are now entering a stage where governments are facing a difficult trade-off between getting the economy back to work and the health risks of people coming into contact with the virus. The big question is; are economies really recovering, or is the bounce back only short-lived due to the re-opening of retail, restaurants and services?

“The US was quick to lift lockdown; however, as we’ve seen over recent weeks this has led to a rise in cases and further measures of lockdown in the worst-affected states.

“Meanwhile, the US labour market remains precarious, and initial unemployment claims rose for the first time since March. These may continue to increase as lockdown measures are reintroduced. Further fiscal support can be expected pending developments in Congress but the cost of the programmes to cushion the blow from unemployment and the loss of income, is now apparent in the government’s borrowing figures. The level of support required is unsustainable in the long-term.

“We have seen some tentative signs of improvement in the data, specifically retail sales and the bounce back of the flash purchasing managers indices (PMI) in May. However, high frequency data point to a loss of momentum in July and the US recovery now seems to be lagging behind Europe.”

Bob Kaynor, Head of US Small and Mid Cap Equities, Schroders, comments on the outlook for US small and mid-cap equities, and how the election outcome could affect these assets:

“Cross currents are still prevalent in US markets. Currently the economic realities of rising unemployment and small business closures are being dwarfed by an unprecedented fiscal and monetary response. Perhaps the greatest evidence of this is that as unemployment rose from 3% to 13% disposable income actually increased by 7%.*

“As Biden rapidly gains popularity in the presidential polls, US markets are beginning to contemplate the policy implications of a Biden presidency. At a minimum, a partial roll-back of Trump’s tax cuts should be considered likely, along with tightening regulatory pressures. Similar to his recent predecessors, executive action, without the required support of congress, will be the most likely path to policy change.

“On the positive side for the economy, any infrastructure bill, which seems to be gaining bipartisan support, is likely to stimulate growth and be inflationary. At this point in the cycle, both would be welcome, especially if accompanied by carefully managed interest rate rises.

“Technology, and secular growth areas in general, would likely lag in the latter environment. When growth is uncertain, market participants pay high prices for certainty, which explains the secular growth leadership we have seen in equity markets so far this year. A broadening of economic growth, accompanied by modestly rising interest rates, would be a relative headwind for technology and other secular growth industries.

“The US remains one of the deepest and most innovative markets in the world. However, the current environment is saddled with many crosscurrents. Having the ability to navigate this environment with a focus on duration and longer term value creation is critical in order to avoid getting caught chasing the volatility as the market digests near-term economic pressures, while also being at risk of being overwhelmed by fiscal and monetary support, which ultimately is finite.”

Piya Sachdeva, Economist, Schroders, provides insight into the data and what the polls are telling us:

“When it comes to forecasting the US election, whether we use macro modelling or polls, both point to a comfortable Biden win. Making adjustments to the polls to learn from failures of 2016 shows that the race could be closer than first anticipated.

“Biden is ahead in almost all battleground states, with Ohio, Indiana and Iowa being the exceptions. When we collate the implied electoral college votes, in the form of leaning states, this suggests that Biden would win 62% of the vote. If we were to allow for more uncertainty, by including ’toss-up’” states (with states polling less than 5% between the candidates), the polls point to Biden winning 57% of the vote. All in all, still a fairly comfortable Biden majority.”

Who’s better for markets; Democrats or Republicans? Sean Markowicz, Global Strategist, Schroders, discusses:

“The perception that a Biden win would be a bad outcome for markets is not substantiated by the historical record on Democratic presidents. Investors should focus on his policy agenda and its potential investment implications.

“If there is a Democratic sweep of Congress, US share prices are likely to price in an increase in corporate tax rates. This would bolster the appeal of non-US equities, especially if coupled with reduced trade frictions.

“On the other hand, if Republicans retain control of the Senate, tax reforms are unlikely to pass. But as most foreign policy decision-making resides with the president, we can still expect an improvement in international relations.

“This combination of the tax status quo and a defrosting of international relations would be the best-case scenario for global markets.

“Over the medium-term, sector-specific issues may arise that could weigh down on the valuations of US health care and tech stocks. Investors should remain on guard if they are overly exposed to such areas.”

Quick Polls

QUESTION

Is the commission procurement rule introduced via clause 5.14 of the Amended Financial Services Sector Code (AFSSC) an important piece of the transformation puzzle?

ANSWER

The clause’s implementation coincides with an increase in the minimum spend targets, which further complicates matters
Many FSPs still view the AFSSC as a matter of choice and consequence rather than compliance
Transformation represents a great opportunity for growth and penetration by brokers
Brokers are unlikely to find their commission business yanked away from them by insurers looking to influence procurement scorecards
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