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Blogs

Election Implications: Impact on Financials & Energy Sectors

Patricia Bannan, CFA

October 21, 2020

How might individual sectors be impacted based on different election outcomes? Through a series of podcast interviews, our experts address top-of-mind questions as it relates to the financials and energy sectors to uncover what’s happening behind the latest headlines.

The views expressed in the blog and podcasts reflect the assessments of the applicable professionals based on current market conditions and other circumstances and do not necessarily reflect the views of CIBC Private Wealth Management. The views expressed here are for informational purposes only and are not intended to endorse, recommend, or favor either political party or any particular agenda. 

As the end of election season rapidly approaches, we have switched our focus from the impact of the election results on the economy and financial markets, to a more focused look at implications on individual sectors. I previously interviewed two of our firm’s investment analysts on the specifics of the technology and healthcare sectors addressing top-of-mind questions. So, what’s happening beyond the headlines in two other key industries—financials and energy? We hear from our firm experts in the fifth and final part of our election implication series.

Financials sector

Portfolio Manager and Senior Equity Analyst Brant Houston, CFA, explains what may impact banks as well as other major groups based on election outcomes.

 

Energy sector

Senior Equity Analyst Lance Marr, CFA, dives into the outlook and potential influences on energy-related policy, a shift to clean energy and sector stock variables ahead of the election.

 

 

For a written summary of the conversations, please see below:

Financials sector

In respect to financial stocks, the most significant issues related to the election are regulations, tax rates, interest rates and spending/deficits.

Under a Trump administration, regulations should continue to ease; under a Biden administration, it would be reasonable to expect additional scrutiny. In either case, the moves would likely be moderate.

Tax rates under the current administration are not likely to move dramatically. Banks were a major beneficiary of the Trump tax cuts in 2018, given their domestic focus. Any move to reverse these cuts by a Biden administration would hurt the banks. Also, increases in taxes on long-term capital gains and/or dividend income could impact how and where money is invested. Bringing long-term capital gain taxes to the short-term level may disincentivize long-term investing, raising trading volumes and volatility. 

Increased government spending under a Democrat administration on healthcare, infrastructure and climate could be a double-edged sword. On one hand, higher deficits may mean higher interest rates that could make stocks less attractive overall, but help banks’ earnings through higher net interest margin. But it is also important to note that deficits are not exclusively a Democrat issue, as we have seen the deficit balloon under the current administration. Any initiative to provide affordable care to the masses could have an economic benefit if it leads to a stronger financial position for individuals. If consumer credit improves, this would be a net positive for banks. And in terms of infrastructure spending, there could be a significant improvement in the employment situation.

Energy sector

The energy sector arguably has the most at stake with a change in the political landscape. As we weigh the scenarios, the status quo appears likely in the event of a Trump win, with a benign regulatory environment, federal support for new energy infrastructure projects and no deals with Iran or Venezuela to bring more oil production on the market. While broadly positive, countering this are expectations for limited production growth as investors demand capital discipline in this low-price environment and state and local governments resisting advancement of new infrastructure projects.

When we consider the scenario for the energy sector under a Biden victory, the main focus will be on incentivizing clean energy. The most notable proposal is a $2 trillion climate plan that includes spending on infrastructure and incentives that would serve to accelerate the transition to clean energy. In a Democratic sweep, no doubt the odds of this plan coming to fruition increase. Obvious beneficiaries are companies exposed to renewable and clean energy at the expense of traditional energy companies. With that said, we don’t expect an outright assault on traditional energy companies. Instead, increased regulation on many facets of exploration and production are more likely than something more onerous, like a fracking ban. The result would be less restrictive on production, but with higher costs associated with that production. Furthermore, we may see restrictions on new permits in federally controlled areas, which could shift production to private lands.

Other areas of action would be a scrutiny of energy infrastructure projects under a Biden administration. A Biden team would likely also work to ease sanctions with Iran, allowing more oil on the market.

If you have questions, please reach out to your CIBC Private Wealth relationship management team.

 

Patricia Bannan is a managing director and Head of Equities for CIBC Private Wealth Management. In this role, she oversees the firm’s proprietary equity strategies.