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Trump vs Biden: 4 policy plans US stock investors are watching

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Investment banks have produced reams of research, created complex models and scrutinised polls in an attempt to predict exactly how the US election will reshape the country’s stock market.

French bank BNP Paribas this week went a step further, hosting the well known statistician Nate Silver of the FiveThirtyEight political website for a “fireside chat” with its clients.

It is the latest offering for investors and traders weighing up what Wall Street will look like in the days and months after one of the most hotly contested elections in modern American history.

G2077_20X Chart showing Biden’s advance in the polls has boded well for stocks that investors bet will do well in a ‘blue wave’

The advice and trade recommendations have covered every area of the market. They have shifted in recent weeks to reflect heightening investor expectations of a “blue wave” in which Joe Biden beats Donald Trump for the presidency and Democrats take control of Congress.

Four key areas many Wall Street banks and research houses think will affect the performance of American stocks are: taxes, infrastructure spending, regulating big tech and each candidates’ plan for the energy industry.

1. Taxes

Cutting the corporate tax rate from 35 per cent to 21 per cent was one of Mr Trump’s hallmark policy achievements. It provided a boost to American companies’ profits and spurred a rise in share buybacks that have in turn helped support the equities market.

Democratic hopeful Mr Biden wants to increase the corporate tax rate to 28 per cent, still lower than the 35 per cent rate from when Mr Trump took office. Mr Biden has also proposed other changes to US tax policy.

Taxes would be the “most direct consequence of a Democratic sweep” for profits of companies listed on America’s benchmark S&P 500 index, according to Goldman Sachs.

The Wall Street bank estimates that if all of Mr Biden’s tax proposals were implemented, it would reduce S&P 500 earnings by 9 per cent, “excluding any potential second-order impact from economic growth, business confidence, or other factors”.

Stocks that would take the heaviest hit would be those that were the biggest winners from Mr Trump’s cuts including AT&T, credit card provider Discover Financial and hotel operator Hilton Worldwide, according to JPMorgan Chase. Strategists at Société Générale warned that groups with weak credit quality and low effective tax rates could be especially vulnerable, highlighting drugstore chain Walgreens Boots Alliance and General Motors.

Still, many research houses expect Mr Biden’s tax proposals would ultimately morph markedly before they are implemented, reducing the overall impact on the stock market.

“It is worth noting that the tax rate has been drifting lower since the 1960s, and it would require significant political will to push tax rates significantly higher,” JPMorgan strategists said. “In other words, headline risk might be greater than actual policy, similar to many scares that have come before it.”

G2077_20X Chart showing JPMorgan has warned that the shares of big beneficiaries of the 2017 tax cuts could come under pressure

2. Infrastructure

If Mr Biden is victorious, investors expect a large boost to infrastructure spending as Democrats look to fund their own Hoover Dam-esque projects. It could lift stock prices and help to offset increased corporate taxes that Democrats plan to pursue, analysts say.

“A large increase in fiscal spending, funded in part by increased tax revenue, would boost economic growth and help offset the earnings headwind from high tax rates,” Goldman strategist David Kostin said.

That would benefit companies in the construction industry, including Caterpillar, Martin Marietta Materials and Jacobs Engineering, according to JPMorgan. Strategists at Société Générale say an infrastructure boost would also extend to utilities — which would power these new projects and the manufacturers benefiting from increased US output — and railroads such as CSX and Norfolk Southern.

Michael Mullaney, global head of research for Boston Partners, said that Mr Biden’s infrastructure spending plans would provide a large boost to the economy that would “have a much bigger fiscal multiplier than anything Trump has put on the table to date”.

3. Tech regulation

Big technology groups including Google, Alphabet and Facebook have come to dominate the US stock market; along with Apple and Microsoft they account for more than a fifth of the S&P 500. It is why calls to more closely regulate or even to split some of the groups in two have been followed so closely by investors.

Tech companies have already increased their spending on lobbying efforts, knowing sweeping changes could soon arrive, regardless of whether a Democratic or Republican president is in the White House. Democrats, including Elizabeth Warren, have called for Amazon and others to be broken up. Yet it was the Trump administration which fired a warning shot this October, when the Department of Justice sued Google for antitrust violations.

“When companies begin to dominate, people get afraid of their power,” said Lee Spelman, head of US equity for JPMorgan Asset Management.

Companies with user generated content, including Twitter, Facebook, Pinterest and Snapchat, are also in the crosshairs of policymakers in Washington. Société Générale strategists say the stocks of those companies could be in for a rude awakening if Mr Biden is elected.

4. Energy

Stark differences in each candidates’ energy policy are also expected to have a significant effect on America’s stock market.

The election comes as energy groups are in the throes of a painful period caused by the fall in oil prices, the coronavirus crisis and the global transition towards cleaner forms of energy.

The S&P 500 integrated oil & gas index, which includes oil majors ExxonMobil and Chevron, has tumbled 50 per cent since the start of 2020.

Strategas, a boutique research and advisory group, said a Trump victory next week would be a boon to the sector. In addition to supporting energy tax subsidies and rolling back clean air emission standards, Mr Trump has also backed the use of federal lands and waters for drilling.

In contrast, Mr Biden has pledged to “transition away from the oil industry” and has also outlined a plan to spend $2tn within his first four years in office to cut carbon emissions and electrify the transportation sector, among other initiatives.

Strategas said the stocks of solar and wind energy providers like First Solar and Renewable Energy Group would prosper as a result.

G2077_20X line chart showing oil and gas companies could lose further ground to clean energy under a Biden administration

Eliminating subsidies to oil and gas companies and a ban on fracking on federal land would deal a further blow to traditional energy groups, analysts say. Société Générale warned that meant shale drillers like Occidental and EOG Resources faced the biggest risks.

Graphics by Fan Fei



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US regulators launch crackdown on Chinese listings

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US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



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Wall Street stocks climb as traders look past weak growth data

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Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.



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Man Group posts tenfold gain in performance fees

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Man Group PLC updates

Man Group, the world’s largest listed hedge fund manager, reported first-half performance fees 10 times higher than a year ago, in the latest sign of the industry’s robust rebound from the coronavirus pandemic.

Strong commodity and equity markets helped take performance fees at the London-based company to $284m in the six months to June, up from $29m a year before when March’s huge market falls hit many fund returns, and the highest level since at least 2015. Performance fee profits were 50 per cent above broker consensus forecasts.

Man also posted $600m of net client inflows in the three months to June, its fourth consecutive quarter of inflows, although the figure was lower than analysts had expected. However, $6bn of investment gains in the second quarter helped lift assets under management to a record high of $135.3bn.

Column chart of Half-yearly performance fees ($) showing Man Group cashes in on market rebound

Man’s results highlight how strongly the $4tn hedge fund industry has bounced back after a turbulent 18 months for markets, including a huge sell-off last spring, as well as sharp market rotations and retail investor-driven rallies in meme stocks that some funds were betting against.

Last year, hedge funds, which have long been criticised for mediocre returns and high fees, made 11.8 per cent on average, according to data group HFR, their best calendar year of gains since 2009 in the wake of the financial crisis.

Investors have taken notice. After three years of net outflows, the industry has posted $18.4bn of inflows in the first half of this year.

Chief financial officer Mark Jones said the hedge fund industry was now benefiting from a tailwind after strong gains last year. “You saw hedge funds deliver exactly what clients wanted,” he told the Financial Times.

“Clients need new sources of return,” he added. They “are trying to reduce their bond exposure, and most have as much equity exposure as they can stomach”.

This year Man has made strong gains at its computer-driven unit Man AHL, named after 1980s founders Mike Adam, David Harding and Martin Lueck, which tracks trends and other patterns in markets.

Its $4.6bn AHL Evolution fund, which bets on trends in close to 800 niche markets, has gained 10.2 per cent so far this year and contributed $129m of the performance fees in the first half. The fund is shut to new money but Jones said that late last year it opened briefly to new investment, raising $1bn in a week.

Man’s first-half profits before tax came in at $323m, well above analysts’ forecasts. The company also said it would buy back a further $100m of shares in addition to the $100m announced last September. Broker Shore Capital said the company had posted “blowout” figures.

Man’s shares rose 2.4 per cent to 196 pence, their highest level in three years.

Last month, Man announced that chief investment officer and industry veteran Sandy Rattray would leave the company. Meanwhile, Jones is set to step down from the board and take on the role of deputy chief executive, overseeing the computer-driven AHL and Numeric units.

laurence.fletcher@ft.com



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