By Tim Courtney, Chief Investment Officer
As of today, it looks like we will have a divided government in 2021 if Republicans win at least one of the Georgia runoff elections.1 Under a divided government, we believe the more ambitious policy and tax law changes are unlikely.2 Markets will begin to factor in more likely changes as the policy and regulatory environment becomes clearer.
Rather than speculating about how governmental actions might affect values, we believe most investors are better off maintaining well-diversified portfolios. This is because while some policies will have clear market impacts, others have less clear and potentially unintended consequences.
For example, if corporate tax rates were to change, we could pretty easily foresee how that would affect company earnings based on their income and structure, and market prices would need to adjust to reflect this. On the other hand, the impact of tariffs resulting from the trade war with China has been much harder to predict. One of the goals of the tariffs was to provide some help to smaller U.S. companies.3 However, it is difficult to determine what benefit these companies ultimately gained from the tariffs as they underperformed, both before and during the second-quarter lockdowns.4
Sometimes if speculators are right about a policy and its effects, they still may not be able to profit from it. There has been great interest in the renewable energy sector in anticipation of greater green policies and regulation.5 Over the last several quarters, many clean energy funds and companies have already seen large inflows forcing prices much higher, meaning even if policies line up to favor these companies their future expected returns are much smaller.5
In addition, corporate policies will also have effects on markets. One issue we are reviewing and discussing is the potential move by several large asset managers to employ a unified Environmental, Social and Governmental (ESG) methodology in their investment decision-making process. If enacted, this change could greatly alter capital costs and market dynamics.
None of this is to deny that governmental policies and regulations can alter valuations and create winners and losers. It is only to note that it is difficult to profit by constantly arranging portfolios to fit changing policies that may be offset by other variables. We will continue to watch for changes affecting markets with a goal of investing in productive companies around the world.
1. CNBC.com (11/13/20) – Second Georgia Senate race will go to a runoff, setting up showdown for Senate control
2. Fortune (11/16/20) – Biden’s corporate tax plan depends on Georgia’s Senate results
3. CNBC.com (5/9/20) – Here’s what small businesses, slammed by China tariffs, are doing to minimize the impact of the trade war
4. Forbes (8/7/20) – Study finds small business revenues dropped 52% and payrolls declined 54% due to COVID pandemic
5. U.S. News & World Report (11/18/20) – Green is the new black in boom for clean energy funds
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