What’s next after elections
Votes are still being counted in three states as we write: Georgia (16 electoral votes, Biden leads 0.2%), North Carolina (15 electoral votes, Trump leads 1.4%) and Alaska (3 electoral votes, Trump leads 28.6%). Even if Trump wins all remaining states, he will have to contest and overturn the results of at least two other states in order to exceed the 270 electoral votes needed for presidency. Therefore, the projection of a Biden win is unlikely to change. Here are some potential post-election outcomes.
Run-off elections in Jan 2021. Control of the Senate will only be decided after 5 January as two Georgia seats head towards runoff elections. With Alaska and North Carolina leaning towards Republican (Figure 1), the way for the Democrats to win is to clinch two Senate seats in Georgia to secure a 50-50 tie and for Vice-President Kamala Harris to give a majority to her party. This is highly unlikely but possible. A more likely scenario is for the Democrats to win one seat in Georgia with the Republicans retaining control of the Senate on a 51-49 lead.
Marginal Democrat win may not equate to decisive pass-through of policies. Even if the Democrats secure a marginal win of the Senate, some policies may be hard to pass. This is because of potential defections during voting. The Democrats have potentially higher defection rates. In the current Congress, Democrat Senators have voted against their party 10.9% of the time compared with 4.1% for Republican Senators (Figure 2).
That said, in matters of Covid-19 relief stimulus, the Democrats have been more unanimous. We may expect similar support in any new stimulus aid.
Near-term focus on fiscal stimulus. In a divided presidency, Biden’s economic and fiscal plans may face opposition from the Senate. The fiscal relief gap between Democrats and Republicans is currently large, at US$2.2tr vs US$500bn. A compromise remains challenging.
Size of relief package. Republican Senator McConnell has been arguing that an economic recovery justifies a smaller bill but Ms Pelosi has rejected the idea of a narrow stimulus package. We do not expect any ‘skinny’ package if both parties insist on their positions. U.S. fiscal stimulus stands at 13% of GDP. Compared to Germany and France, government measures amount to 33% and 21% of GDP respectively. The U.S. would need US$1-1.5tr in its next bill to catch up with its European friends.
Timing. The previous bill to fund the government will expire on 11 Dec. If some form of relief stimulus is passed alongside a new bill before 11 Dec to avoid a government shutdown, markets would be cheered. However, it remains questionable if Trump would sign the bill into law at the moment. He previously suggested a ‘tremendous stimulus package immediately after the election’ but this seems more like a campaign tactic. A more likely timeline, we think, is 1 Feb 2021, after the inauguration. This is when Biden may start to exert his influence on passing stimulus.
Other than relief packages, a split Congress could also affect Biden’s other agenda.
We favour the clean-energy space with a Biden win. Although a split Congress may imply reduced green-focused stimulus, we believe the secular shift towards clean energy will accelerate during his term.
We also favour the healthcare sector, particularly pharmaceutical/biotechnology and healthcare service providers. A divided Congress could mean resistance to big legislation and we may end up with little or no structural change. This would remove uncertainties for the sector, largely seen as positive.
Limited or no tax hikes should favour financials, particularly the larger banks whose profits broke new records after Trump’s 2017 tax cuts. A split Congress may produce resistance to the reinstatement of financial regulations rolled back by Trump. Big tech may also gain from continued tax savings and gridlock in the implementation of regulations.