Rising risk of a progressive left US Democratic presidential candidate
In this episode we will be discussing US politics and Brexit.
[0:30] How likely is impeachment?
The likelihood is a low chance of impeachment that leads to the removal of Donald Trump from office. The colour of the politics in the US has changed quite dramatically in the US, the key change happened in September. Nancy Pelosi, the Democrat leader of the House of Representatives (HOR) finally began a formal impeachment inquiry into President Trump over his involvement in the alleged withholding of US foreign aid to the Ukraine in exchange for a probe into Democrat rival frontrunner Joe Biden. A consequence of the impeachment inquiry is that it has reduced public support for Joe Biden in opinion polls and boosted the popularity of Elizabeth Warren, a keen advocate to impeach the president. Critically, Elizabeth Warren has enough momentum behind her that the betting market now places her as the favourite to win the Democrat presidential candidacy.
[1:28] Given the balance in the senate, would you say the actual impeachment of the president isn’t that likely?
It is very likely that Donald Trump will get impeached by the House, where the democrats have the majority.. However, the Democrats would then need a two-thirds majority in the Senate (the other legislative chamber in the US bicameral system) to convict President Trump and remove him from the White House. Considering that the Republicans hold a 53-seat majority in the Senate, it would take at least 20 Republicans to vote against the president, a move that seems unlikely at present. Chance of that happening is very unlikely and the actual process of this happening could take up to a year.
[2:24] As you say Elizabeth Warren is seen as a progressive left candidate – how left are we talking here?
She can be considered the Jeremy Corbyn of America. A lot of her policies focus on the economy, and the market is very sensitive to that. They include tax increases, tighter regulation and wealth distribution.
Specifically, sectors that look vulnerable are healthcare, where Elizabeth Warren wants to impose price controls on pharmaceuticals, while the tech industry would be sensitive to her aims to break-up large cap tech counters like Amazon, Google and Facebook. Energy would also be hit by a ban on fracking, while banks would be sensitive to greater regulation and falling bond yields if a flight to safety sell-off in equities occurred. It is worth noting that healthcare, tech, energy and financials account for 53% of the S&P 500 stock market index.
[3:46] When will we get a clearer indication on the likely outcome?
Markets will have a better idea who the candidate will be in March-April 2020 when the bulk of Democratic primaries are scheduled. Should Elizabeth Warren pick-up a sizeable number of delegates to cement her nomination as Democrat presidential candidate, US (and global) markets could well struggle to perform. However, should Elizabeth Warren tone down her left-wing rhetoric to move closer to the centre ground, then markets may take a more sanguine view of this political risk. We will continue to monitor the situation.
[4:30] Is there anyone else, a moderate candidate?
On the moderate side they have Pete Buttigieg and Joe Biden. If Joe Biden’s campaign continues to go badly, it is possible Hillary Clinton could put her hat in the ring again to take up a position to be moderate against Elizabeth Warren – that is possible.
[5:10] Onto our own domestic political foibles, it looks like a no deal Brexit appears to be off the table, is that your view?
Our base case is now that Boris Johnson has negotiated an acceptable deal, particularly to the European Research Group on the right of the party, although it hasn’t got the acceptance from the DUP. In the option polls, the country seems to be supporting this. A lot can change with the election on 12 December. The key risk for markets is that Boris doesn’t secure a majority in parliament and we could have a hung parliament.
[6:18] Is that a key risk around the election as you see it?
Our base case is that Boris will get a majority. However, his popularity could start to fall, maybe Jeremy Corbyn on his campaign trail might start to revive some support.
[6:50] Markets have been very nervous about a Corbyn government and some of the policies that would bring in, do you think that risk has also diminished?
Even if Labour were to get in, they seem likely to be in a coalition, which would be dilutive?
I think there is an argument that the risk of a Labour majority government has certainly come down – and with it all the policies of, for example, renationalisation, high taxes. As you say, if we do have a coalition with the SNP also with the Lib Dems, the risk of a hard left agenda would be reduced.
[7:42] Tentatively you have been dipping your toe back into UK equities, is it the reduction of the downside risks that has lead you to look for value there. What’s your thinking?
The key message for investors from the government’s Brexit deal is that the tail risk of a no deal Brexit has been reduced. Given the economic agenda of “Borisnomics” (see our September Investment Outlook) to bolster growth through a combination of ending austerity and deregulation, and our base case is that the UK leaves the EU with a deal, we expect overseas’ investors to step-up interest in UK stocks.
[8:48] Anything else you would like to highlight?
Specifically, we favour UK domestics (as captured by the FTSE 250 index) to outperform internationally-focused stocks, as broadly represented by the FTSE 100 benchmark index. That’s because; i) FTSE 250 stocks offer higher forward consensus Earnings Per Share growth of 6.4% over the next 12 months versus 5.7% for FTSE 100 constituents and ii) FTSE 250 stocks tend to outperform FTSE 100 when sterling appreciates, since overseas earnings are lowered when translated back into a stronger domestic currency.
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This episode was recorded on 4/11/2019
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The Pulse from Smith & Williamson
Investment Show: Rising risk of a progressive left US Democratic presidential candidate
Broadcast on Smith & Williamson at 09:00, 4th November 2019
Available online from 10:00 on the same day .