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The Divergent Sectoral Effects from Biden’s Potential Economic Agenda
- By Gregory Peters, Head of Multi-Sector and Strategy
- October 29, 2020
- This summary focuses on a potential Biden win and Democratic Senate majority given the scale of the possible change in a Blue Sweep scenario. Conversely, the scenario of a Trump re-election and a Republican controlled Senate could maintain much of the status quo in place since 2016.
- The Green agenda could be the most transformative and costly set of policies under a Biden administration with vastly divergent effects across and within sectors, e.g. the potential divergence in the natural gas industry compared to the oil industry. A portion of the Green agenda could be financed through higher corporate and personal tax rates on certain households.
- In a Blue Sweep scenario, we evaluate a potential acceleration in GDP and corporate earnings amid the likelihood of significant fiscal stimulus against the offset from potentially higher corporate tax rates—from 21% possibly into the 26-28% range over time—and increased personal tax rates for higher-income households.
- We believe investors should remain focused on corporate operating fundamentals as it is one of the key pillars of credit investing. While investors may focus on the prospects of higher tax rates, we see little evidence to suggest that tax policy drives price performance. Rather, operating cash flow is the key determinant of spread direction.
- We place lower probabilities on a split Presidency and Senate, and although partisan gridlock has historically been beneficial for financial markets, the backdrop of a global pandemic doesn’t necessarily lend itself to an environment where political stalemates, in which neither sufficient tax cuts nor fiscal stimulus prevails, would be well received.
- Other policies that could be implemented under a Biden administration include tighter regulation on certain sectors (including on the tech sector), a tough but multilateral approach to China (possibly with steps to rejoin the Trans-Pacific Partnership), and a more conventional political operating style.
The three categories of sectoral effects—the Winners, the Losers, and the Unaffected—under a potential Biden presidency and a Green agenda underscore the importance of sector rotation and credit selection—picking the winners and avoiding the losers will be key to generating consistent alpha going forward. Admittedly some sector implications are more obvious and intuitive than others.
Potential Sector Winners
- Green or Renewable Energy Sectors—We are generally bullish on renewables under a Biden administration as these policies could spur a quicker transition to low-carbon technologies. However, nuanced approach to energy is warranted:
- The natural gas sector may benefit from lower oil rig counts, and the reduction in associated gas from oil wells may provide support to natural gas prices as well as to credits in the sector, particularly those in the high yield universe. Given the lower-carbon footprint of natural gas, it could also be viewed as a bridge fuel in a transition to alternatives over the next several decades.
- The pipeline sector could see a fringe benefit from improved credit quality as a Green agenda could curtail new development and prompt a reduction in expenditures amid already reduced demand.
- Infrastructure Providers—Significant fiscal spending could provide a particular boost to those focused on green projects.
- Consumer Staples and Lower-tier Retail—Consumer spending could also see a sizable boost from a potential fiscal package as soon as Q1 2021.
- Municipal Bonds—The broader sector may benefit under several scenarios, including greater federal support for state and local municipalities, adjustments to state and local tax (SALT) rates, and tax rate increases for high-income households.
- Credit Risk Transfer Securities—Mortgage insurers have received notable support under Democratic platforms. The sector could benefit from slowing reforms for Government Sponsored Enterprises, particularly if there is a change in leadership at the Federal Housing Finance Agency.
Potential Sector Losers
- Oil and Other Carbon Intense Energy—The energy sector is front and center in terms of investor concerns, given the significant regulatory risk that it faces from the aggressive proposals in the Biden agenda. Again, a nuanced approach is needed:
- A large fiscal stimulus package could support commodity and oil demand and thereby contribute to a potential inflationary environment.
- The potential for a new U.S./Iran deal could lead to more production from Iran and place renewed pressure on oil prices. Lower crude oil prices could impact the marginal cost of U.S. shale production and subsequently support natural gas prices.
- Consumer Loans (ABS)—Portions of the sector could face pressure in a scenario where the Consumer Financial Protection Bureau (CFPB) gains greater influence. The private student loan segment of the ABS market and student loan servicers could also face risks in a Blue Sweep scenario.
- University Bonds—A push to address and reform higher education costs could place pressure on this segment of the municipal bond market.
- Technology—The sector is a general target for tighter regulation, and it may also face pressure from a tax perspective globally. However, fewer restrictions on the H1B Visa program could provide a benefit.
- Other Sectors Facing Potential Pressure—Health insurance and pharmaceuticals, defense contractors, and firearm manufacturers.
Potential Unaffected Sectors
- Large Banks—We see little room for significant reforms to banking regulations, particularly given the magnitude of reforms that were implemented following the financial crisis.
- Utilities—We believe there is little threat to the credit quality of utilities as the increased costs that these issuers may incur could largely be passed through to consumers.
- Commercial Real Estate, Commercial MBS, and Residential MBS.
The Biden Green agenda has attracted attention for its potential transformative effect on the economy and for the potential costs involved. While these primary effects of a Biden Presidency, or a Blue Sweep, may point to certain sectors, the less obvious, derivative effects of a Green agenda on certain sectors cannot be overlooked. Identifying these effects and sectors will be key in determining the winners and losers under a potential Biden Presidency.
This material reflects the views of the authors as of October 29, 2020 and is provided for informational or educational purposes only. Source(s) of data (unless otherwise noted): PGIM Fixed Income.
Gregory Peters
Gregory Peters is a Managing Director and Head of PGIM Fixed Income’s Multi-Sector and Strategy. Mr. Peters is a senior portfolio manager for Core, Long Government/Credit, Core Plus, Absolute Return, and other multi-sector Fixed Income strategies, in addition to having oversight of the firm's investment strategy function. Prior to joining the Firm in 2014, Mr. Peters was the Chief Global Cross Asset Strategist at Morgan Stanley, responsible for the Firm's macro research and asset allocation strategy. In addition, he was Morgan Stanley's Global Director of Fixed Income & Economic Research. Earlier, he worked at Salomon Smith Barney and the Department of U.S. Treasury. He received a BA in Finance from The College of New Jersey and an MBA from Fordham University. Mr. Peters is a member of the Fixed Income Analyst Society and the Bond Market Association.
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