DIGIT Digest - US Election 2024: Impacts on European markets, trade, and investment

Listen to the latest episode of our podcast series, DIGIT Digest. In this episode, Rebecca Maclean, Co-manager of Dunedin Income Growth Investment Trust, is joined by Paul Diggle, abrdn Chief Economist. Rebecca and Paul discuss the implications of the upcoming US election having heard more about the policy priorities from Trump and Harris. The US economy is performing well and with Europe more dependant than ever on the US as an export destination, the outcome of the election remains a key consideration for UK investors.

Transcript

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Podcast from Aberdeen Investment Trusts.

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Hello and welcome to Digit Digest. I'm Rebecca Maclean and I manage the investment trust with Ben Ritchie. Today we're sitting down to talk about the implications of the upcoming US election. We've heard more about the policy priorities of Trump and Harris in the last couple of weeks. And so we've been thinking about what this means for European companies.

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The US economy is performing well and the risk of a hard landing has receded this year. But growth is moderating. With Europe more dependent than ever on the US as an export destination, the outcome of the US election and the subsequent health of the US economy remains a key consideration for European investors. To discuss the implications today, we have the perfect guest with us, Paul Diggle, chief economist at abrdn.

00:00:59:17 - 00:01:19:09

Welcome, Paul. Thanks, Rebecca. Great to be here. Great. So maybe we'll start with the polling, which suggests that the presidential election on the 5th of November will be a very close race. Is it too close to call? So if you looked at the head to head polling you'd say Harris is the favorite. She leads something like 49% to 46%.

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However, I think the best bet we can make at this point is that it is basically a coin toss. It is probably 50/50, and there are a few reasons I would play down or fade Harris's lead in the polls. For a start, the election isn't actually decided in the national poll. It's decided in the Electoral College, 538 Electoral College votes from all the states.

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So the first to get 270 wins. We basically know who the majority of those Electoral College votes are going to go to. There's only really a subset about 93 votes across seven swing states, Wisconsin, Michigan, Pennsylvania, Arizona, North Carolina, Georgia, Nevada. They're going to decide the election and the polling gaps there are just much, much narrower than they are at the national level.

00:02:01:15 - 00:02:24:19

So I think that's a good reason to play down Harris's lead. The Republicans often in recent elections had an advantage in the Electoral College as well. Democrats tend to build up votes in urban centers where that is already safe to Democratic. The distribution of Republican votes across the country is more efficient. I remember, of course, that Clinton in 2016 won the popular vote but lost the Electoral College.

00:02:24:21 - 00:02:46:24

And then I think the final reason is that the real number one issue this election is the economy. Voters say that they're going to be voting on the economy and on inflation, and that Trump is ahead in voter perceptions of handling the economy and that Biden and now Harris campaigns think that's really unfair, because as you're highlighting at the start, the US economy is still doing pretty well, even if it's slowing now.

00:02:47:01 - 00:03:18:11

That should be kind of reflected in support for the Democrats. But that inflation overshoot experience is just so important in the minds of consumers. And that's really weighed on perceptions of how Democrats have been handling the economy. I think if you put it all together it's basically 50/50. Yeah. And I suppose then there's the question of the Congress and potential implications of a divided Congress, I suppose, in terms of the speed of decision making, but also, what are the chances that the policies that come to spring forward are actually going to get through?

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So how do you think about those implications? Yeah, I think that's a great point. The actual policy makes it either candidate were they to win will be able to carry out is going to depend crucially on the composition of Congress. And if Harris wins the presidency, she's actually very unlikely to win both houses of Congress. And in particular, the Democrats are defending a number of seats in the Senate that Trump won in the presidential election last time around.

00:03:44:08 - 00:04:09:07

And by contrast, Republicans aren't really defending that many close run Senate races. So, you know, people who follow US elections would say that it's a difficult map for the Democrats in the Senate. So the Senate is overwhelmingly likely to flip from Democrat to Republican. So say Harris won. She then has a split Congress. And then the policy she can do is probably quite a constrained version of her overall policy agenda, a bit like Biden at the moment.

00:04:09:07 - 00:04:27:22

Right? Who has a split Congress on the other hand, if Trump won, he actually has probably a 50/50 chance of getting the unified control of Congress as well. And that gives him a much better chance of following through on his full agenda. Now, it's important to note that probably the parts that the market worries most about the trade agenda.

00:04:27:22 - 00:04:47:08

He can do that anyway, with or without unified control of Congress, because a lot of these powers sit with the president through executive order. But the bolder fiscal and perhaps aspects of his regulatory or deregulatory agenda, they might require unified control of Congress to follow through on okay, so maybe turning to some of the policy priority of Trump and Harris.

00:04:47:08 - 00:05:07:20

We've heard more from them in the last couple of weeks. You know, we're trying to get to the bottom of what it means for European investors. So, you know, crucially, the economy and trade are going to be important drivers there. What do you see as the main differences from a market perspective. So a few crucial areas of the policy agenda.

00:05:07:24 - 00:05:38:17

There's fiscal there's trade I think there's the most important one. But then there's also interesting things to say about immigration policy. Foreign policy, monetary and dollar policy. On fiscal. There is common ground in the sense that both candidates fiscal platforms are quite expansionary, their deficit expanding, but they would do it in different ways. In the case of Harris, it's mostly focus on tax credits, tax breaks for families of children, for first time home buyers, for home builders, the start ups for companies doing R&D.

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She would also, I think, extend parts of Trump's original Tax Cuts and Jobs Act when that comes up for renewal in 2025. And I think for everyone earning under $400,000 in the US, you would extend that but raise taxes on the wealthiest. And then where is there's probably bipartisan support for those aspects of her fiscal agenda. So it doesn't matter how Congress goes.

00:06:02:07 - 00:06:30:19

Her main revenue raiser, which is an increase in the corporate tax rate, probably requires, unified control of Congress. But either way, that is still a fiscally expansionary agenda. And in Trump's case, it's even more fiscally profligate. He would fully extend his original tax cut to probably do a second major piece of tax cutting legislation, including lowering the corporation tax further, revenue he would raise from tariffs is probably going to be quite small.

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So you're talking about quite large increases in the deficit in both cases more so under Trump. Remember all that comes against the backdrop of already building concerns about the US's fiscal position. On trade. I think it's a case that Harris would broadly follow through on Biden's trade agenda, which of course, saw all of Trump's tariff increases remain in place and then some increase a lot more. 100% tariffs on Chinese EVs, restrictions on semiconductor exports to China.

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And that is sort of known as the small yard high fence trade or industrial strategy. You know, you target a small number of strategically important industries and goods, especially in tech, in green energy and steel, and aluminium. And then you put a really high fence around them, really high tariff rates. And Trump meanwhile, he's obviously going to go much broader.

00:07:18:17 - 00:07:42:17

He's talked about 60% tariffs on China, 10/20% tariffs on the rest of the world. So a really quite material increase in protectionism. But a few words on some of those other policy areas. Immigration that's going to matter. Trump talking about stepping up deportations, in a big way, in the recent surge in migration into the US has actually been quite, it had its cost clearly, but it's also had benefits, macro economically in terms of higher labor force participation.

00:07:42:17 - 00:08:04:24

It's actually put downward pressure on wages. So you could see some reversal of that foreign policy, you know, a super important aspect of Trump's agenda. So he wants to bring ceasefire in Russia, Ukraine. So I think that could that could have some big implications. And then there's monetary and dollar policy where Trump wants to take a much more activist and politically involved role in the setting of monetary policy.

00:08:05:01 - 00:08:31:12

He also wants to see a weaker dollar, even though some of his trade stuff is going to cause a stronger dollar. So potential for a lot of volatility in some of those areas of policy. Yeah. So both candidates going to platform says this expansion, which has implications for inflation. But I think that the question of tariffs is certainly something which the market is concerned about because we've seen in the past the implications and the impact that tariffs can have on particular sectors, which have been targeted.

00:08:31:12 - 00:08:55:00

So it sounds like, you know, both candidates, will have an inflationary impact, but that question of tariffs I think is something which is front of mind from your sort of house view of inflation and the health of the US economy. To what extent would Trump's tariff program impact that outlook? So I think you should think of tariffs as inflationary and as weighing on growth.

00:08:55:01 - 00:09:17:23

That's certainly the direction the magnitude of the impact is very complicated. For example, on inflation. If you raise tariffs there's then going to be behavioral changes that will alter the consumption basket. People will just shift from the tariff goods to other goods. So maybe the headline tariff change doesn't translate 1 to 1 for an increase in the sort of effective tariff rate.

00:09:18:00 - 00:09:40:22

There's also, you know, economists love questions of tariff incident. So who ultimately pays the tariff. Who's actually absorbing that cost. Is it producers in the exporting country who are taking it as a hit to margins. Is it consumers in the US who are basically paying it? And then it's a form of tax? Is it absorbed by a broader dollar appreciation?

00:09:40:22 - 00:10:01:12

And then it's kind of absorbed by, us consumers, but, but very broadly. And then there can be offsetting impacts to growth. So you put inflation up but you weigh on growth. And then the kind of second round implications of weaker growth would be weaker inflation. So it's complicated. But I think and if you look at models you get wide estimates.

00:10:01:12 - 00:10:21:14

But the sort of tariff increases. We're talking about Trump doing 60% on China, ten on the rest of the world. They could add easily half a percent to a percentage point on to the rate of core inflation, but perhaps more on headline. They could knock off perhaps half a percent to as much as 2%, depending on what model you use from GDP growth.

00:10:21:14 - 00:10:53:19

So those are pretty material impacts. And they have the potential, if done in full, to change how we understand the US economy at the moment, which is, growing pretty strongly, albeit now starting to cool. And with inflation that's clearly moderated a lot and is now basically around the Fed's 2% target. Yeah. I mean, I'll be interested in your thoughts on the US consumer in that context because we know the consumer really has had to bear a high level of inflation over the last couple of years now has spent down those Covid savings that have been built up.

00:10:54:00 - 00:11:18:01

So, you know, there is some nervousness around the US consumer. You know, we've been speaking to Diageo, which is a holding in the trust, which is facing challenges around, and material destocking cycle post Covid in spirits. But on top of that, it's facing a cautious consumer in the US, which they continue to believe will be the case towards the end of the year.

00:11:18:05 - 00:11:40:15

But this is offset by a company which has got very strong brands and pricing power. So it's in a good position, sort of relatively. But what's your view on the US consumer and the outlook? The US consumer has been to this point, amazingly resilient. And I think above and beyond how many economists thought that that was going to play out, particularly post-pandemic.

00:11:40:17 - 00:12:05:13

And that was a story of one pandemic era savings overhangs, which were pretty large, to the fiscal support that US consumers received during the pandemic. And then three, a willingness for the US consumer to spend down those savings overhangs and actually just take the savings rate now pretty low. And that's a real contrast to, say, European consumers, but even more so to Chinese consumers.

00:12:05:13 - 00:12:31:23

You just did not see the post, reopening consumption boom that played out in the US. I mean, fast forward several years and clearly that story is now much more extended, and it's hard to see the consumer in the US continuing with quite the same strength as it's had. And indeed, if you look carefully, you can see signs of consumer stress, particularly at the lower end of the income distribution.

00:12:31:23 - 00:13:00:15

So a good way to see that is that credit card defaults have been picking up in the US. Auto loan defaults been picking up by less and then mortgage defaults haven't really increased at all. And that's telling you something as you move through the the income brackets, where the kind of stress is and where the consumer is probably running a bit more on fumes at the lower end, but probably is still doing quite well at the higher end, because after all, total household net worth in the US is still pretty strong.

00:13:00:15 - 00:13:26:11

It hasn't been a huge downward adjustment in house prices. Meanwhile, with the stock market very strong, 401k is doing well. Actually, total consumer net worth is still pretty resilient. So look I think it's a case of what has been a really, really robust consumer is definitely cooling. But I don't think we're at a point in the cycle where the consumer is it's cracking, is falling off a cliff, and you're not seeing dynamics that would be consistent with with a downturn and a recession.

00:13:26:13 - 00:13:45:24

And then I suppose thinking about other sectors, which could be European sort of industrial sectors, which could be impacted by tariffs. We've been looking at what it means for the auto sector, for example, it can impact the sector by, you know, there's companies which import the vehicles into the US. And so they'll be impacted by the tariffs there.

00:13:46:01 - 00:14:17:07

But there are also implications for European industries if there are increasing tariffs on China, because you get this situation where you get sort of dumping into Europe where the Chinese can no longer sell into the US. And, you know, we've seen this in the past and Europe's in a difficult situation. Yeah. There's a delicate balance there between protecting industries, as a responding to some of those, you know, with anti-dumping measures, for example, but also maintaining open trade policies, which they support.

00:14:17:07 - 00:14:39:12

So you'd expect the governments to respond if that was the case. And then there's the other element of like, what can companies do in terms of managing their own exposure. So Mercedes Benz is in the trust and it has a quarter of its sales to the US, but it also has US domestic production too, which in the US spent about 20% of its assets.

00:14:39:12 - 00:14:59:12

And so it can to an extent offset some of the impacts of tariffs by changing where it's producing, but also the mix of its sales. So I'm interested in if you've got any thoughts about other sectors which could be impacted by tariffs. Yeah, I think Europe is definitely very much in Trump's sights. Trade wise this time around.

00:14:59:12 - 00:15:28:06

You know, Europe is after China, the country running the economy, I should say running the largest deficit with the US. So I think autos, especially EVs, as you've been highlighting, I think they're very much in the sights. There's going to be measures taken there. And it matters for Europe, not only for its sales to the US, but as you're saying, that there's a large integration of auto supply chains with China, and there's large amounts of European auto producers who are producing in China as well.

00:15:28:06 - 00:16:00:09

So there's definitely action there. If you look at some of Europe's other large exports to the US, it's things like manufactured goods, machinery, aerospace, chemicals. So I think that there's there's there's potential for a lot of upheaval there. The silver lining or the good news is that there's probably also the scope for a deal to be done, here between the US and Europe in a way that there might not be in China, you know, if China, he might be pursuing full kind of economic decoupling with Europe.

00:16:00:09 - 00:16:26:13

He might be using tariffs as a negotiating tool, as a as a lever. And you could think that things that Trump might particularly want to extract from Europe are increased defense spending. You know, he's obviously had a long running concern with European NATO spending levels and accusations of European free riding under the US defense umbrella. So, I think that you can do stuff to sort of appease Trump on that front.

00:16:26:13 - 00:16:50:13

And that would also then have impact on European stock markets, of course, as that change patterns of spending. I think you sort of raised a good point there in terms of the different outcomes based on where you are in relations and and particularly sort of the US China relations. You know, there remains tension and there seems to be bipartisan support for a tougher approach to China.

00:16:50:15 - 00:17:13:06

You know, both sides seeing China as a competitive threat. And as you mentioned at the beginning, we’ve seen Biden continue their hawkish stance towards China and build on some of those, initiatives that were set out from the Trump administration. So what is your base case around US relations with China, and is there much of a difference between the candidates approach?

00:17:13:08 - 00:17:39:12

So they're clearly on a deteriorating trend. And as you say, that it is because, hawkish approach to China is now a completely bipartisan area, bipartisan agreement in the US. And that in fact, could be one of Trump's biggest kind of longer lived policy legacies, that it was really with him that the US moved from what was previously called the sort of Washington consensus where China was a rising economic power.

00:17:39:12 - 00:18:02:04

And as it grew in wealth, it would also gradually shift its kind of, political model to a more open, perhaps democratic society. And I think it was really Trump who politically brought about a widespread mindset shift that actually this was we were observing the rise of a geostrategic and economic competitor, and that is now complete cross kind of aisle issue.

00:18:02:06 - 00:18:26:16

And you saw that in Joe Biden, kept in place all of Trump's tariffs on on China indeed went further in many of those. So I think this is about forcing a degree of economic decoupling and trying to contain China's rise by, for example, restricting its access to leading edge technology and especially semiconductors have become a key axis of that.

00:18:26:18 - 00:18:53:24

So I think Trump, we should take him pretty seriously when he talks about 60% tariffs on China. The wild card is, of course, that Trump sees interactions with foreign governments in very personal terms. So there is the potential for a kind of a Trump summit that has, you know, good vibes and he's quite happy with the personal interaction he has there.

00:18:54:01 - 00:19:16:14

And then suddenly the narrative of China's a duo strategic competitor or an economic competitor whose rise the US must try and stifle shifts all of a sudden, because now he's kind of personal friends with XI Jinping. So that's the wildcard. But certainly the structural driver is that, that we are in a world of increasing economic competition between the US and China.

00:19:16:16 - 00:19:42:11

Yeah, I think it is fair to assume that there will continue to be export controls on particularly those sensitive technologies of semiconductors and AI which, you know, up until now have been targeted and ASML is held in the trust which has been exposed. And you know, we've seen sentiment towards the company shift as we've seen tensions between the nations rise.

00:19:42:16 - 00:20:15:00

So you know, already ASML has restrictions on some of its technology and particularly the most leading edge technology sales to China. And we are anticipating some incremental restrictions on, elements around their servicing of tools as well. But in terms of a more material impact for the company, you need to see governments restricting more mature, sort of, lagging technology export to China to to make a material difference to the business.

00:20:15:06 - 00:20:44:23

And there I just think there's there's quite a few implications which would stop that and limit it. And, you know, not least you've got the, you know, industry backlash if that happens, but you've also got the potential for China to retaliate, and itself restrict export of semiconductors or other important products to the West. And so it really kind of comes down to, you know, to what extent the, the politicians are willing to risk that by escalating tensions.

00:20:45:00 - 00:21:19:20

So, you know, it certainly is a theme which does drive sentiment towards the company. But I think in terms of actual impact, it will be less material than, the many fear at this point. And remember, Trump uses the stock market as a sort of scorecard in a way. So if it's the case that aspects of his agenda, the trade agenda, start to cause negative repercussions in equity markets, there's potentially a self-correcting mechanism in the place, you know, Trump watches the stock market go down and thinks

00:21:19:20 - 00:21:40:13

okay, I need to recalibrate what I'm doing now that could be an overly optimistic story to tell. But it's definitely one that people tell about Trump and it's how you construct, actually Trump could be quite good for you know, risk markets in the end, type stories. I'd be interested in your thoughts on climate change policy and oil.

00:21:40:13 - 00:22:08:14

So, you know, the 22 Inflation Reduction Act did outline significant programs and investment in clean energy and renewable energy in the US. But we are seeing this divergence between Europe and the US in terms of that path towards decarbonization and energy transition. So Trump has come out very strongly in support of US fossil fuels. You know, drill baby drill.

00:22:08:16 - 00:22:43:23

And talking about scaling back some of those Inflation Reduction Act programs and in particular the support which is out for electric vehicles, which, you know, he's taken a very sort of more negative view on. So I'd be interested in your thoughts on the implications for oil production in the US, but also clean energy technology. Yeah. I mean, maybe start with Harris because she's historically been anti-fracking, pro additional regulation on fossil fuel companies in the US and then has had to soften a lot of that line during this campaign.

00:22:43:23 - 00:23:07:14

And it kind of it's sort of obvious why Pennsylvania is one of the crucial swing states. It's, obviously where a lot of, US fracking is done. So that's why she's softening those lines. So she now explicitly supports the continuation of domestic oil and gas production alongside increasing green energy production. And that really means she's the effective continuity candidate with Biden policies.

00:23:07:20 - 00:23:40:12

She would, I think, want to protect large swathes of the Inflation Reduction Act. With Trump, he obviously views fossil fuel production just more favorably than Harris. Kind of from a philosophical standpoint. He's talked about increasing new permits for fossil fuel production in the US. He's pro rolling back regulation on oil and gas drilling. And I think he has in mind, or at least the people around him have in mind, the importance of US energy independence from a strategic standpoint.

00:23:40:14 - 00:24:03:03

I think he’s probably going to cut back funding for the EPA, which he also did in is in his first term Environmental Protection Agency. And he probably attempts to roll back elements of the Inflation Reduction Act, especially, as you say Rebecca, around electric vehicles. Well, I think his concerns are both sort of straight up akismet type concerns on the one hand.

00:24:03:05 - 00:24:33:22

But equally, he's obviously worried that the US is at a structural disadvantage because of China in the production of EVs. You know, the access to the rare earths, that go into batteries. And you see this now with hundred percent tariffs, it's very hard for us to be competitive with Chinese EVs. But I don't think he rolls back the entirety of the Inflation Reduction Act, particularly because a lot of the benefits, a lot of the subsidies of the IRA accrue into states that are red states.

00:24:33:22 - 00:24:59:05

And that was partly deliberately out of the Biden administration designed the IRA. But I think that makes it quite difficult for Trump to fully unwind it. Yeah. I think about, the support, for example, that he is giving to US fossil fuels. What does that mean for the oil price? You know, we've seen volatility in the oil price recently.

00:24:59:09 - 00:25:25:12

And there's only so much the domestic policy framework can impact that global demand for oil because it comes down to, you know, what's happening in terms of the demand outlook. And so that's then a function of the macroeconomic environment. But also, you know, what's happening from a capacity perspective of oil supply from other, producing nations. And so it's a much more complicated and system to, to think about.

00:25:25:14 - 00:25:49:11

It'll have a direct impact, you know, policies on, on the oil price. And ultimately, when we think about demand for energy, when we're considering you know, the trends around AI and greater compute power, the projections are for higher levels of energy consumption and likely electricity consumption. And so that then translates into demand for the crucial infrastructure which supports that.

00:25:49:11 - 00:26:21:14

So, the trust invests in National Grid, SSE, you know SSE is a UK company, but National Grid does have operations in the US. You know, those companies very much play into that need to invest in order to upgrade electricity networks in order to handle the increasing energy demands of all the economies. And so I think sort of the programing noise around, around the election, what it means for commodity prices, but ultimately those long term structural trends are not going away.

00:26:21:14 - 00:26:48:02

And so, no change that medium term view. Yeah. And so many of the drivers of oil price forecast prices are going to be happening outside of Washington, so both these long term structural drivers you've been talking about, but also just straight up demand driver from the performance of the Chinese economy. Clearly, you know, a very live debate in global macro markets at the moment, whether China's at an inflection point or not, with its stimulus measures.

00:26:48:04 - 00:27:10:01

Of course, events in the middle East, they're going to have a huge impact on oil price and on the kind of political risk premia that's built into oil on supply, Iranian supply supplies through the Strait of Hormuz. What OPEC plus does in terms of its supply response, and then perhaps bringing it back to Washington. What you could see is, is an attempt to stabilize the oil price through release.

00:27:10:01 - 00:27:37:01

It's from the strategic Petroleum Reserve. So that could be, I think, one way in which the US seeks to to kind of dampen global oil price volatility, especially heading into an election. Well thank you, Paul. You know, thanks for showing your insights today on Digit Digest. I think, you know, a number of themes that you pulled out, really highlighting the complexity of the system of how policy can feed through and impact economies through different mechanisms.

00:27:37:03 - 00:27:58:03

But also, you know, raising a number of the elevated tensions and risk which are on the horizon for companies to consider, you know, whether it's trade relations and tariffs and this is a, you know, a challenging environment for many companies to be operating in. And so it requires thought and analysis to work out what it means for individual companies.

00:27:58:05 - 00:28:23:02

Which is what our day job is. So that really has been fascinating. Thank you so much for sharing. And I think that's all we've got time for today. Thank you Paul, and thank you everyone for listening. Don't forget to like and subscribe wherever you get your podcasts. And we'll speak next time.

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