Taxes, trade, and tech: why the US election matters for South African investors
|Published
As the race for the White House continues – with the US presidential elections scheduled to take place in less than three weeks’ time – South African investors are reminded that the stakes extend far beyond political leadership, and the global economic ramifications are substantial and far reaching.
With US vice president Kamala Harris leading former President Donald Trump in national polls – albeit with razor-thin margins – the potential policy shifts could significantly impact South African investors’ global investment strategies.
Several of the latest national polls appear to favour Harris, but some are within the margin of error, reflecting an incredibly tight race. Ultimately, swing states are likely to decide the 2024 presidential election and resulting policy shifts.
They outline six key areas for local investors to note as the countdown to the election continues:
1. Tax policies
A Harris victory could result in higher corporate taxes, which may affect global market performance and increase risks for local investors. Aside from rising corporate tax rates, investors could face higher capital gains taxes, taxes on carried interest, share buybacks, spinoffs, and executive compensation. In short, limited exclusively to tax, a Harris win would be viewed as a negative for corporate profitability and investor returns.
Trump cut the corporate tax rate from 35% to 21% in his first term and is looking to reduce taxes to as low as 15% for domestic manufacturers. Trump is also promising a somewhat haphazard range of tax exemptions on tips, overtime and social security payments. While tax cuts will be good for the consumer and the economy, the already large deficit makes significant tax cuts impractical at this point.
2. Regulatory landscape
Regulation is another area where the presidential candidates differ, particularly concerning financial institutions. A Harris presidency may cement the adoption of Basel III capital rules, requiring large US banks to increase capital reserves, and potentially lowering returns — a win for regulator. A Trump administration, however, would likely favour deregulation, easing capital requirements and potentially boosting bank returns — a win for shareholders.
3.Big tech
When it comes to big tech, both candidates share concerns, but their strategies diverge. A Trump victory would likely maintain the current administration's efforts to limit the dominance of big tech companies through antitrust actions. While a Harris administration might continue scrutinising these firms, analysts anticipate a more balanced approach, possibly leading to settlements in less substantiated cases involving giants like Apple and Amazon.
As large cap US tech stocks continue to dominate global indices and investor portfolios, local investors are likely to be impacted by aggressive antitrust action, which could be a headwind for returns, especially in the context of high starting valuations.
4. Tariffs and trade
Harris and Trump also align in favouring protectionist trade policies, especially regarding China, which could result in higher tariffs and increased market volatility. Imposing high tariffs could bring about unintended consequences, such as making US industries complacent and less competitive globally.
The Biden administration, with Harris as its extension, has already introduced significant tariffs on Chinese electric vehicles and restricted semiconductor exports. Trump, on the other hand, advocates a 60% tariff on all Chinese goods. These tariffs will impact global supply chains, potentially driving inflation and affecting South African import costs.
However, he cautions that tariffs may not achieve their intended outcomes. China remains the world’s largest producer of clean energy products and is well-positioned to maintain its dominance, regardless of US protectionist policies. The impact of these tariffs may be more inflationary than corrective, raising costs for US consumers while failing to weaken China’s global position.
China’s record trade surplus and dominance of Electric Vehicles and clean energy is a testament to the competitiveness of their economy. While they provide subsidies and support to local industries, so do developed markets including the US and Europe. Trump’s intention to implement broad tariffs on China could result in retaliatory tariffs and potentially a trade war between the two largest economies in the world. This will not be good for global growth and South African investors could be negatively impacted in this scenario.
5. Energy policy
Energy policy presents one of the starkest contrasts between the candidates. A Harris presidency would likely continue the current focus on renewable energy, accelerating the transition to green energy through tax credits and subsidies, particularly under the Inflation Reduction Act (IRA). A continuation of these policies would benefit clean energy sectors and support investment in renewable technologies, which could drive long-term shifts in the global energy market.
Conversely, Trump’s pro-drilling stance could increase domestic oil production, leading to short-term gains for oil service companies but potentially undermining global efforts to transition to net-zero emissions. While long-term green energy transitions remain crucial, a Trump presidency may offer opportunities in traditional energy sectors over the next few years.
6. Geopolitics
The outbreak of wars in Ukraine and the Middle East reflects poorly on Biden, especially compared to the relatively peaceful period during Trump's first term. Trump has historically been antiwar preferring bluster and dealmaking, which is consistent with his business - rather than political - background. He has repeatedly stated his intention to end the Ukraine war in his first week, and is likely to adopt a more pragmatic approach as the military industrial complex will have less influence if he is president.
The winner of the election is inheriting an economy with robust growth and low unemployment, albeit driven by government spending and deficits not seen outside of a severe recession. A move to trim the deficit will slow the economy, while continuing to spend at this rate increases the risk of a debt crisis in the coming years. The next president faces a difficult task in ensuring both a soft landing and debt sustainability.
While US presidential elections do not materially drive markets, these areas of policy divergence between the candidates will indeed affect corporate profitability and South African investor returns.
The US election outcome could significantly impact markets, taxes, regulations, and investment strategies. While we aren’t political prognosticators, we’ve positioned our portfolios to not only weather this uncertainty but also to take advantage of the opportunities we see ahead.
Brian Arcese is a global fund manager at Foord and Rashaad Tayob, macro strategist and portfolio manager at Foord.