How are the Trump and Biden administrations planning to tackle foreign policy, and what would it mean for investors?

Foreign policy has been the forgotten issue of the 2020 election, dominated by the pandemic, civil unrest and accusations of corruption and mail-in ballot fraud. However, in an age of struggling US-China relations and rising populism, we can expect it to become a central aspect of the new administration. Therefore, what are the key differences in the candidates’ policies, and how can investors expect to profit?

 

Trump’s isolationist ‘America First’ stance on foreign policy has decreased multilateralism and global cooperation, in turn harming foreign direct investment (FDI). The president has withdrawn the US from 13 international agreements, and pursued a policy of economic isolationism. These policies encouraged US companies to repatriate earnings, causing global FDI to fall 10% in 2018. Trump also blocked 22 deals worth 50 million USD or more, including the proposed 117 billion USD takeover of US chipmaker Qualcomm by Singapore’s Broadcom. This totalled 150 billion USD worth of foreign investment being denied to certain American companies by Trump. It seems therefore that a Trump win would have encouraged investors to ‘Buy American’, asking them to identify companies not prone to a foreign and especially Chinese takeover, and requesting the avoidance of countries constituting a geopolitical threat to the US.

 

Trump’s China policy has been dominated by the US-China trade war. In total, the US has imposed tariffs on more than 360 billion USD worth of Chinese goods, and China has retaliated with more than 110 billion USD worth of tariffs. The Asian region was the most sensitive to the subsequent economic slowdown reflecting both its dependence upon physical trade in goods and the direct application of tariffs to many companies operating there. Worldwide, the most sensitive companies to the slowdown would be economic cyclicals, such as machinery, automobiles and chemicals. Commodity related stocks would be hit by lower prices in this eventuality. Thus, further trade uncertainty with China is detrimental for international equity portfolios.

 

Biden’s foreign policy indicates that it plans to boost multilateralism by undoing Trump’s protectionist measures. For example, the Democrat candidate has pledged to immediately re-join the Paris Agreement through executive action. Instead of relentless trade wars against China and the EU, Biden is well-positioned to launch a new era of “fair trade” agreements that balance enhanced market access with high labour, human rights and environmental standards. This means investors can once again hold a globalised portfolio, as well as increasing positions on the US consumer sector which will no longer be affected by tariffs and trade uncertainty.

 

Biden’s China policy is less clearly a reversal of Trumpian protectionism. The Democrat’s preference for multilateralism raises the potential for greater co-operation with China. However, this same cooperation, likely to be concentrated in the West, gives America ‘substantial leverage to shape the rules of the road on everything from the environment to labour, trade, technology and transparency, so they continue to reflect democratic interests and values’, as Biden himself said. While remaining politically hawkish on China, we can expect an end to trade tariffs on China because of the increased prices on the US consumer. Investors should remain cautious while Biden’s China policy develops, remaining quietly bullish on a potential strengthened yuan and surge in investment in Chinese equities.

 

In conclusion, the effect of the election on one’s portfolio depends on asset allocation. While US equities, especially those unlikely to receive foreign investment, would have benefitted from a Trump victory, globalised portfolios, the US consumer sector and Chinese domestic stocks are all set to benefit from Biden’s win. As the election results came in, the global stock markets had already started to climb. This is indicative of the economic climate investors can expect throughout Joe Biden’s presidency.

 

By Veena Tadikonda

Sector Head: Jackson Philips

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