Election 2020 and implications for global equities

23 oct. 2020

Key takeaways:

  • Canadian investors are looking at the 2020 U.S. elections as a catalyst for changes to foreign policy and trade
  • Two entrenched investment trends will remain in play regardless of the outcome: deglobalization and innovation
  • These dynamic trends have increased the importance of diversifying international equities in investor portfolios and to not lean too heavily on U.S. equities for generating returns

In addition to potential changes to U.S. domestic policies related to tax, spending and regulation, the outcome of the 2020 U.S. elections also has the potential to usher in major changes on the international front related to foreign policy and trade.

Canadian investors are watching to see how potential turnover in the White House and Congress might affect risk appetites in the short term and, more broadly, sway performance between U.S. and non-U.S. stocks over the long term.

The BlackRock Investment Institute (BII) believes a victory by Democratic presidential nominee Joe Biden would likely signify a return to more predictable foreign policy and trade relations. Moreover, a Democratic sweep of the White House and Congress would likely bring about more stimulative fiscal policy despite the risk of higher U.S. corporate taxes and a re-regulatory agenda. This potential boost to U.S. growth alongside a more predictable trade policy could benefit export-focused economies, including emerging markets. A second term for President Donald Trump, by contrast, would likely mean a continuation and perhaps doubling down of an “America First” stance on trade and immigration.

Regardless of the election outcome, BII sees the U.S.-China rivalry remaining front and center, since there is bipartisan support in Washington for a tough stance toward Beijing.

For investors, two notable long-term trends are likely to be highly relevant to international equities well beyond the election: deglobalization and regional innovation.

Deglobalization: a structural trend

The coronavirus pandemic has had profound effects on global business operations and supply chains, ultimately accelerating the ongoing trend of deglobalization, which refers to a retreat in multinational trade and investment (Figure 1).

One result for international investors has been the growing need to look beyond the U.S. for global asset growth that was previously accessible by investing in U.S. companies with robust multinational operations.

Figure 1: Global total trade volume declined since 2016

Chart: Global total trade volume declined since 2016

Source: Thomson Reuters, as of September 2020

Rising global protectionism is upending assumptions about how investors tap into global growth through their allocations to international equities. For example, the growing weight of companies in the consumer, healthcare and information technology sectors within U.S. equity benchmarks has come at the expense of sectors that are historically correlated with global growth, such as energy and materials. Investors should expect more divergent outcomes between the U.S. and international equity indexes, and they may increasingly need to look beyond U.S. equities in order to truly diversify equity returns.

Innovation is increasingly global

Technology dominates the Chinese and U.S. equity markets and has accounted for a large share of the recent outperformance there. Short-term changes in U.S. trade policy are unlikely to alter the trend for more innovation and entrepreneurship to take place on the global stage. As technology both broadens and deepens throughout the emerging world across a wide range of activities, including smartphone adoption, mobile payments and e-commerce penetration, we would expect corresponding growth in the tech opportunities available to investors in these markets where technology is presently less well represented. We highlight some statistics outside of the U.S. in Figure 2, and a few notable trends below:

Growth in e-commerce has been significantly faster for leaders in Southeast Asia, where e-commerce penetration is still in the single digits versus teens in Europe, 27% in China and 18% in the U.S.1 As a result, both user growth and e-commerce penetration are gaining rapidly in the Southeast region, a trend accelerated further by the COVID-19 lockdown.

A growing middle class, coupled with developing infrastructure and increased numbers of skilled workers, can help generate significant growth potential for business innovations and new technologies in less-developed markets.

World-leading innovations are now coming outside of the U.S. in areas such as industrial automation, payments and renewable energy. For instance, the number of patents issued in China surpassed the U.S for the first time in 2019.2 In Europe, robotics projects funded by Horizon 2020, a European Union research-funding program, have driven innovation efforts for robotic applications in areas including manufacturing, transportation and agriculture.3

Figure 2: Rising influence

Chart: Rising influence

Source: IMF World Economic Outlook as of April 2020. Market cap is based on the MSCI ACWI Index as of September 2020.

Summing it up

Investors who are singularly focused on November to determine the makeup of their international equity allocations may be missing structural shifts that should remain in play regardless of which party controls the White House.

The connectedness of global supply chains is in flux, and the epicenters for technological innovation are shifting. These trends support broad-based international equities exposure within Canadian investor portfolios.