US elections: positioning in US equities

We look up in quality to build resilience and identify long-term structural winners, with uncertainty likely to push higher as the election nears. When taking an index approach, we look to exposures with a quality tilt. Quality has remained in demand with investors this year, with inflows of US$22.3B globally YTD – making it the most popular factor in 2024 so far.¹ With the healthcare sector streaking ahead in the last US earnings season in terms of year-on-year EPS growth, healthcare is also a key tactical quality call in the current environment.

We continue to look through fast-moving headlines in the US and focus on outcome-neutral trades in US equity sectors. We stay positive on US banks and broader financials, and look for index exposures with a strong weighting to this sector. As with US energy, this is not just an election-driven trade, but that backdrop is key to our view. We see little regulatory risk from the political backdrop for large-cap banks – though the risk may be higher for their regional peers. Overall, the sector looks cheap, at c.12x forward-looking P/E versus 22.9x for the broader S&P 500; the valuation gap versus European banks has widened; and earnings have been improving.² We see a further catalyst in an improved commercial real estate outlook, off the back of better financing costs.

We maintain our conviction in US banks despite looming rate cuts: banks have been reducing their interest rate sensitivity over the past year and should now see a smaller negative net interest income (NII) hit on lower rates. Moreover, we think that large-cap banks can weather lower NII, due to a robust loan book and the potential for investment bank dealmaking to pick up from a lacklustre 2023. According to our framework, which analyses returns and volatility since 1988, banks and broader financials score highly on a return and volatility-adjusted return basis in election years.³ A tighter regulatory environment remains a risk, but we don’t see meaningful change this year, given razor-thin majorities in Congress. We’ve seen $2.9B added to US financials sector ETPs globally so far in 2024.⁴

We are closely watching potential changes on US trade, immigration and energy policy, and see a potential inflation boost no matter who wins the White House. Both Democrats and Republicans have adopted a protectionist stance in recent years, though the Republican nominee, former President Donald Trump’s suggested 10% baseline import tariff – rising to 60% for Chinese goods – goes further than his Democratic rivals. Major changes to legal immigration would have implications for inflation, squeezing US labour supply against the backdrop of an ageing domestic workforce. Together, these proposed policies suggest a negative supply shock, putting upward pressure on inflation.

The potential for higher and broader tariffs could dampen sentiment towards Asian countries and sectors beyond China. A negative growth shock for China could impact Taiwan, Hong Kong, Korea the most.⁵ This is in large part due to bilateral trade agreements and high revenue exposure to China in general for those markets. There is the added potential corollary of independent tariff implementation from the US to those markets in Asia that don’t have Free Trade Protection agreements in place, including Taiwan, Thailand, Vietnam and Malaysia. India could be seen as one net beneficiary to increased China tariffs as a sourcing alternative to Chinese goods and net exports trending higher.⁶