Here’s How a Biden Victory Could Give European Assets a Boost

(Bloomberg) -- With the polls and the betting markets showing Joe Biden can beat Donald Trump in November’s presidential election, some money managers are buying European assets in anticipation of the region emerging as a big winner should there be a change of guard at the White House.

The likes of JPMorgan Asset Management, Eaton Vance Corp. and Schroders Plc favor European equities, currency and bonds ahead of the vote, in an effort to get ahead of the game. Some say Biden’s climate and infrastructure plans will boost European clean energy and cyclical equities, while others are buying Europe mainly as an alternative to the U.S. stock market, which they expect to sell off if Biden delivers on a pledge to increase corporate taxes.

Although the outcome of the U.S. election is highly uncertain and -- as past experience shows -- a lot can change in three months, it has the potential to become another momentous event for European markets. The region’s stocks, German bunds and the euro have been enjoying a strong rally in the past months thanks to unprecedented stimulus measures, including the landmark deal for a 750-billion-euro ($888 billion) economic recovery fund.

According to Chris Dyer, director of global equity at Eaton Vance, the election, and in particular its tax consequences, will serve as a potential catalyst for investors to shift their geographical positioning to markets outside the U.S.

“After a sustained period of outperformance of U.S. equity markets since the global financial crisis, we believe that we are entering an extended period of outperformance of European equity and international equity in general, which can persist for several years,” said Dyer, whose firm has about $500 billion under management.

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One of the biggest fears plaguing Wall Street is Biden’s pledge to reverse most of Trump’s 2017 tax cuts, which had fueled a rally in U.S. equities. With the S&P 500 having surged back near record high levels, U.S. stocks aren’t pricing in this possible impediment to profit growth, Dyer says.

So instead of U.S. equities, Eaton Vance has been increasing its exposure to European banks and cyclical shares that can win from the economic recovery on the back of stimulus measures.

Less Protectionism

The possibility of a less confrontational U.S. global policy under Biden, and with it less volatile markets, may also appeal to investors in Europe.

According to Edward Park, deputy chief investment officer at Brooks Macdonald Asset Management, the region’s exporters would stand to benefit from reduced China trade risks, while an improvement in Chinese buying power would support European manufacturing sectors, especially in Germany. European consumer discretionary and automotive stocks would be the biggest winners in this scenario, he said.

When it comes to the European currency, Park expects it to continue strengthening in the event of a Biden victory, because demand for the dollar would weaken amid lower geopolitical risks.

Those sentiments are shared by Wolfgang Bauer, a fixed-income manager at M&G Investments, who recently added to long euro positions and reduced dollar longs.

Energy, Infrastructure

The Biden campaign last month unveiled clean-energy and infrastructure plans that included $2 trillion in spending over four years, with the goal of cutting carbon emissions from power generation to zero by 2030. According to Rajesh Tanna, a portfolio manager at JPMorgan Asset Management, European companies would be some of the biggest beneficiaries of this program.

“Offshore wind is one of the most attractive industries to invest in, it’s really a mega trend and Europe dominates in it,” Tanna said.

Increased spending on infrastructure will be positive for cyclical European sectors, such as energy, materials and industrials, according to Nathan Thooft, Manulife Investment Management’s head of global asset allocation.

European Progress

Some investors, like Ross Hutchison at Aberdeen Standard Investments, see the prospect of a Biden victory as a marginal positive for European risk assets, but their focus remains on the region’s economic recovery and stimulus measures. Hutchison is overweight German bunds on bets inflation will continue to stay low.

For Dorian Carrell, a multi-asset fund manager at Schroders, the outlook for European equities and credit improved over the past weeks after the unexpectedly quick approval of the EU Recovery Fund sent a strong message of support for the region’s recovery.

“From a medium-term perspective, we favor Europe marginally over the U.S. because there’s a valuation opportunity there and it’s been under-owned. Looking at potential changes ahead in the U.S, there may be a tactical opportunity,” Carrell said.

©2020 Bloomberg L.P.