By sector, the implications of a sweep scenario are somewhat clearer. A key priority would be Infrastructure spending and green initiatives, benefiting materials and industrials at the expense of the oil and gas industry. Sectors most exposed to higher corporate taxes are financials and consumer discretionary stocks whereas the most insulated is utilities. Anti-trust regulatory scrutiny does leave the IT and communication services sectors more exposed, but we think such oversight is unlikely to derail their performance. If anything, certain initiatives can unlock opportunities for value creation. We think the implications to Canadian equities are positive at the margin, as the policy changes would raise the relative competitiveness of Canadian companies, while a stronger U.S. fiscal impulse would benefit Canadian demand through the economy’s trade linkages.
As noted previously, we expect a Biden victory or Democratic sweep to be USD negative and supportive of Emerging Markets (EM) equities, largely through the trade war channel as tensions would ease. We acknowledge, however, that the election outcome and policy implications are difficult to pinpoint. Given current market pricing, the risk today is if Trump is re-elected, which could strengthen the dollar. But at the same time, a Democrat sweep is also not fully priced. Overall, more cautious positioning around the November election may be advisable, even though the likelihood of a risk-off outcome is low in our view.