By Jeremy Siegel, CEO, Portfolio BI
How the 2020 Presidential election may shape buy-side market dynamics
Irrespective of whichever candidate wins the Presidential election in November, the incumbent will be saddled by a Covid induced recession, one of the worst economic crises on record. According to data from the Commerce Department, US GDP between April and June contracted by 32.9% on an annualized basis, a decline which dwarfs by some measure the Great Depression almost a century ago. The US economy is experiencing a very fragile rebound. Although payrolls grew by 1.76 million in July and there was a moderate bounce-back in retail sales, unemployment is at levels three times greater than what it was pre-pandemic while many schools remain shut.1 A recovery is also contingent on the virus levelling out or a vaccine being found, both of which do not seem imminent.
Further de-regulation on the horizon
Since the election of Donald Trump, there has been widespread de-regulation of the financial services industry, most notably banks. One of the most significant initiatives taken by the current administration was its decision to ease some Volcker Rule’s more prescriptive requirements, exempting smaller banks (i.e. those with <$250bn in assets) from regular stress-testing. Additionally, the Volcker Rule will no longer apply to even the smallest of banking institutions, namely those with <$10bn in assets. They have also adopted other amendments. For example, they have loosened trading restrictions enabling banks to participate in market making. However, banks still cannot engage in proprietary trading and restrictions on investing into hedge funds and private equity remain in place. Nonetheless, the revisions make it easier for banks to invest in venture capital and credit funds.
More recently, the Securities and Exchange Commission (SEC) announced it would simplify reporting requirements for investors including hedge funds. Under the existing rules, equity investors with more than $100m in investments must disclose details about their securities holdings every three months in a form known as 13F. The threshold for reporting, however, could be increased to $3.5bn in what would effectively exempt around 90% of small asset managers from the rules, thereby facilitating major cost savings. Consequentially, it is likely that should the Republicans win the White House this year, there could be further de-regulation of the alternative asset management industry.
A new party in charge
There are many that speculate that a Democrat victory could prompt a sudden reversal of the post-2016 de-regulation initiatives, although not everyone is convinced. The American Banker, for instance, suggested any major changes–including the repeal of some recent modifications to the Volcker Rule – would take time to implement. Elsewhere, other pundits believe the Democrats are more interested in attempting to promote greater diversity and inclusion on company boards. On tax, democratic candidate and former Vice President Joe Biden has adopted a more nuanced, less bombastic approach, relative to other Democrat policymakers. Again, this is reassuring for private equity and hedge fund managers.
Perhaps the biggest regulatory shift will be on ESG (environment, social, governance). In fact, many institutions in the US–such as pension plans and hedge funds–are greening their portfolios as they look to generate superior returns. Under the current regime, though, the Department of Labor is proposing that private pension administrators demonstrate that they are not undermining financial returns by investing into ESG assets. Such policies–assuming there is a Biden victory–could be shelved in favor of a more progressive ESG approach. This could mirror initiatives in the EU, which is pursuing a Sustainable Finance Action Plan. Under the EU’s proposals, institutional investors will need to evidence and publicly disclose how they integrate ESG into their decision processes. A Democrat victory in November could result in greater emphasis being placed on ESG investment.
What to expect
Forecasting what will happen in the U.S. Presidential election is difficult given the volatility and ongoing Covid-19 crisis. Regardless of who emerges victorious, the winner will be laden with one of the steepest recessions in history. Facilitating a smooth and rapid recovery will be the utmost priority.