It’s official: the next US President is going to be Joe Biden, while Donald Trump is going to go down in history as one of the few US presidents who was not elected for a second term in office.
Trump’s foreign policy towards China can best be described as confrontational.
Many investors would be familiar with the US-China tensions by now as both sides refuse to give in to demands, resulting in heavy tariffs being levied on either side.
With Biden in the top seat, the spotlight will again shift back to these relations if one can see past the current COVID-19 pandemic.
Many businesses’ livelihoods hang in the balance, as US monetary and fiscal policies may either help or hinder them.
As an investor, how should you position your investment portfolio?
Are there any significant implications arising from this election?
Taxes and guns
An expected result regardless of whether the Republicans or Democrats win is the raising of corporate taxes.
Business leaders who were surveyed just two months ago believe that corporate tax rates will be raised to pay for the huge stimulus bill the government incurred to help those impacted by the pandemic.
Should this come to pass, such legislation will crimp the net profits of all corporations in America.
Larger businesses with higher net profit margins can absorb such higher taxes more effectively than a smaller business with poor margins.
Investors may decide to focus on larger, reputable names that can better weather this tax rise, as the magnitude of the increase is still not known at this point.
The other big issue at hand is gun sales.
2020 has seen record gun sales as more Americans stock up ahead of the election for fear of violence, while issues of police brutality have led more people to arm themselves for protection.
This trend will certainly benefit firearm manufacturers such as Smith and Wesson (NASDAQ: SWBI) and Sturm Ruger (NYSE: RGR), whose shares have seen year to date gains.
But do note that a win by Democrats may introduce tighter gun control laws that may crimp sales in the near future.
The heady mix of politics and economics
While some may point out that the direction of politics does influence economic policies, the effects may not be that apparent.
In general, politics and economics have a tenuous relationship as every incumbent President is provided with a guidebook on how to navigate economic crises and challenges.
Investors need to ask a key question here: will businesses turn out differently if either party won the election?
If we take a leaf from the Global Financial Crisis, it was the US government that helped to bail out banks such as Citigroup (NYSE: C) and insurers such as AIG (NYSE: AIG).
These interventions would have occurred as a way to rescue the banking system from total collapse, and are independent of political affiliation.
Many great businesses have thrived through decades irrespective of whether the US was ruled by Republicans or Democrats, and we believe that they should continue to do well if they possess the characteristics to grow their revenue and earnings.
Business factors are at play
Investors should examine their investment theses and look at the underlying reasons for buying the companies within their portfolios.
A great business should be defined as one with superior economic characteristics such as a strong competitive moat, competent management and enduring long-term catalysts.
These attributes should determine the types of businesses we choose to include in our portfolios.
Markets and industries are influenced more by consumer trends, business cycles and other random events rather than politics alone.
A great business should be so independent of any election outcome.
Get Smart: Don’t do anything you’ll regret
Some investors are nervous about the election outcome that they are poised to sell everything for fear of a market crash.
Our take is: don’t do anything rash that you’ll end up regretting later on.
While politics does have some influence on corporate policy, it has been proven time and again that great companies can continue growing no matter which party is in power.
Investors do have to endure short-term share price volatility.
But as long as you keep your eyes focused on the long-term growth of the businesses within your portfolio, you will turn out just fine.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
