(Bloomberg) — With Joe Biden on a path to winning the U.S. presidency but control of the Senate still up in the air, investors in European stocks have been forced to review their outlook for some key industries.
Market players had spent months positioning for post-election outperformance in European renewable-energy and cyclical stocks, accompanied by weakness in health care and technology. The thinking was that a “blue wave” of Democratic wins would lead to increased fiscal stimulus and support for alternative power, along with higher corporate taxes and possibly legislation that hurt drug companies.
Now, Biden looks to be just squeaking out a win, with the outcome in the Senate in limbo until January and the possibility that it remains in Republican hands. With the prospect of divided government, investors are reversing those bets.
European technology, consumer and health-care sectors were among the top gainers following the election, while shares in more cyclical industries — banks and energy — declined. This marks a significant shift in market favorites, after tech stocks had slumped 12% in the two months leading up to the vote.
“If the outcome is a Biden win with a divided Congress, we would anticipate less drastic policy action,” said Raj Tanna, a portfolio manager at JPMorgan Asset Management. “One could potentially start to see opportunities open up in areas that underperformed in the run-up to the election.”
Here are the key European sectors to watch in the aftermath of the U.S. vote:
The European health-care sector is particularly in focus as a possibly divided Congress would reduce the chances of Biden pursuing legislation that could push drug prices lower and expand access to government health programs.
Most large European pharmaceutical groups get a big share of their sales from the U.S. market, with AstraZeneca Plc, Novartis AG, Roche Holding AG and Novo Nordisk ASA all particularly sensitive to U.S. drug-pricing reform. As the prospect of higher U.S. corporate taxes fades, they stand to potentially benefit.
“It’s almost the sweet spot for the sector in terms of a little bit of gridlock,” said Dani Saurymper, a fund manager at AXA Investment Managers U.K. Ltd. “Some of the more potentially adverse scenarios are avoided. It might well be that there will still be some form of drug pricing reform on a bipartisan basis, but the likelihood is, if something is going to be bipartisan, whatever comes, it won’t be as bad as what might have come.”
Autos and Luxury
Even if Biden’s power is limited by a split Congress, European carmakers are seen as the top winners of his presidency on the reduced risk of a trade war between the U.S. and Europe. The sector has been underperforming the broader benchmark since 2018 when Donald Trump made the threat to impose tariffs on cars imported from the region.
Fiat Chrysler Automobiles NV, Michelin and Daimler AG are the most exposed European automakers to the U.S. market, according to UBS Group AG analysts.
European top luxury brands, such as LVMH, Remy Cointreau SA and Pernod Ricard SA, are also likely to be relieved about reduced trade tensions. Trump had threatened imports of whiskey, wine, Champagne, handbags and men’s suits.
“Trump wanted to slap tariffs on European exporters, and we can reasonably believe that Biden won’t have this kind of approach,” said Florent Delorme, macro strategist at M&G International Investments SA. “He’ll rather seek to strengthen U.S. ties with Europe, which hasn’t been the case at all with Trump.”
Ahead of the U.S. elections, European tobacco was seen as a sector that could suffer from higher U.S. corporate taxes, according to Bloomberg Intelligence analyst Duncan Fox.
Scandinavian Tobacco Group A/S, Swedish Match AB, British American Tobacco Plc, and Imperial Brands Plc were among European tobacco firms that rallied on Wednesday as a Democratic sweep of the Senate became more uncertain, reducing the likelihood of aggressive reforms.
“A Biden presidency and a Democrat Senate may have been more aggressive in terms of legislation against tobacco” products, such as menthol and flavored cigarettes and potentially next-generation products, said Richard Buxton, head of strategy, U.K. alpha at Jupiter Asset Management. Without a sweep for the Democrats, “there won’t be the scope to do much radical” reforms, he said.
Biden’s plans to spend $2 trillion on clean energy and fighting climate change may be at risk under a Republican Senate. European renewable-energy stocks, such as Vestas Wind Systems A/S and Siemens Gamesa Renewable Energy SA, declined on Wednesday.
JPMorgan U.S. alternative energy analyst Paul Coster said that Biden “will need to collaborate with a split Congress, and implementation of a Green New Deal in the next two years looks unlikely.”
However, alternative energy stocks bounced back on Thursday as some market players speculated that Biden will be able to use executive power and federal regulation to push clean energy use even with a divided Congress.
Ahead of the U.S. elections, UBS strategists saw European technology stocks, and especially hardware companies, at risk from higher U.S. corporate taxes because the latter get 29% of revenue from the country. If the Senate turns Republican, this threat will likely be removed.
According to Lars Kreckel, global equity strategist at Legal & General Investment Management, a split Congress would also reduce the likelihood of aggressive regulatory reforms in the tech sector.
Nataliia Lipikhina, global equities strategist at JPMorgan Private Bank, favors European technology companies on the low interest rate environment and on such drivers as the transition to electric vehicles and 5G technology.
Cyclical European stocks underperformed after the U.S. elections on concern about less-generous fiscal stimulus if the Republicans control the Senate.
Still, some market players, including Manulife Investment Management’s Nathan Thooft and Eaton Vance’s Chris Dyer, expect the size of fiscal stimulus to be substantial enough to support an economic recovery. A focus on infrastructure spending should also be positive for European construction and infrastructure stocks with exposure to the U.S. market, such as CRH Plc.
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