Equity Outlook  |  Q4 2020

2020 election analysis

Equity Research Team

2020 election analysis

As we approach the 2020 U.S. presidential election, Putnam’s investment professionals consider the impact each candidate could have on an array of industries.

INFRASTRUCTURE

Elizabeth C. McGuire

Analyst, materials and industrials

With either a Biden or a Trump administration, we believe that a large federal infrastructure bill is likely to be passed in 2021. This has been a focus for governing officials for a while for a number of reasons. They include high-profile bridge collapses as well as a D+ grade on the American Society of Civil Engineers’ 2017 Infrastructure Report Card. Now, our crumbling infrastructure will be combined with the need for post-COVID economic stimulus, increasing the likelihood of an infrastructure bill.

Biden’s current proposal is to spend $2 trillion on infrastructure over four years. This includes more traditional spending on roads, bridges, and waterways, as well as “green” spending in areas such as electric vehicle charging stations and sustainable homes. Trump has floated a $1 trillion amount, with a heavy focus on traditional road and bridge work.

Congress matters too

Congressional races are also important. We believe a Biden administration with a Democratic House and Senate would result in the quickest passage of an infrastructure bill, and one that would include a higher spending total and a greater focus on “green” projects. For stocks, we believe construction materials and equipment companies would benefit most directly, as would electric vehicle suppliers. Indirectly, to the extent that an infrastructure program creates more jobs, consumer stocks should also benefit.

Companies we're watching: Aggregate and cement suppliers Summit Materials (SUM) and CRH (CRH LN).

PIPELINES

William C.Rives, CFA

Analyst, Portfolio Manager of Putnam Research Fund

Oil and gas pipelines and midstream infrastructure face a challenging outlook regardless of who is elected, although a Biden victory could bring additional long-term difficulties. Conditions are not good for the pipeline industry. Some of the largest U.S. pipeline projects, costing billions, have been canceled due to regulatory uncertainty. Existing pipelines are also being challenged and could face temporary or permanent shutdowns.

The biggest headwind has been the ability of environmentalists to use courts to delay projects until it doesn’t make economic sense to continue them. In our view, conditions will not change if Trump wins in November, since many of the issues are not driven by federal policy.

Biden win could bring longer-term challenges

We believe the near-term impacts of a Biden administration would be manageable. There is the potential for Biden to eliminate fracking permits on federal land, but this is not a major source of production. Other issues are more significant. Biden wants to eliminate carbon from the power sector by 2035. The power sector represents roughly one third of U.S. natural gas demand, and this would be a headwind for natural gas pipeline volumes. Biden also supports expanded electric vehicle adoption, which could pressure oil pipeline volumes.

Companies we're watching: Entrenched pipeline operators Williams (WMB) and Enterprise (EPD).

OIL AND GAS

Ryan W. Kauppila

Analyst, global natural resources

The politicization of energy and climate issues that accelerated under President Obama has continued under the Trump administration. Campaign rhetoric suggests more of the same under Biden, who declared in a March debate: “No ability for the oil industry to continue to drill, period.” There is little evidence that either party wants to use free-market tools to address de-carbonization (e.g., a carbon tax). Rather, the preferred policy choices are myriad supply- and demand-side decrees such as rules around federal drilling permits, biofuels regulations, and highly complex fuel efficiency mandates.

Potential for international oil price inflation

In aggregate, Trump’s deregulation efforts and tax policies have lowered the costs of U.S. production and the slope of global oil and gas supply curves, negatively impacting both prices and the returns achieved for producers. The consensus view today is that Biden’s anti-hydrocarbon mantra would translate into a similarly challenging period for energy equities. However, I suspect the supply impact will overwhelm any demand attrition over the near and medium term. We could see a surprising inflationary period for international oil prices under a Biden administration. From an equity investing perspective, that would likely be negative for the returns of U.S. producers, but beneficial for producers outside the United States.

Companies we're watching: Cenovus (CVE), BP (BP), and Total (TOT).

HEALTH CARE

Michael J. Maguire, CFA

Analyst, Portfolio Manager of Putnam Global Health Care Fund

It’s not easy to find areas where politicians from both sides of the aisle are in agreement. Medicare Advantage, the privatized version of Medicare coverage, has been a resounding success in the view of Republicans and Democrats. Because of this and our aging population, we believe many managed care insurance companies are well positioned for growth, regardless of the election outcome. Medicare Advantage is likely to stay intact, but a Biden administration may seek to expand the benefits, such as lowering the eligibility age. Democrats are also more likely to seek increases in government funding for Medicaid. This could weigh on managed-care stocks because margins are typically lower with government coverage.

The most complex challenge: Drug pricing

Both parties agree that drug pricing is a significant problem. Drugs are getting more expensive, and the co-pay structure is poorly designed. Both Biden and Trump are likely to focus on this issue, putting pressure on retail pharmacies, drug manufacturers, wholesalers, and pharmacy benefit managers. This incredibly complex challenge will continue long after the election. We also find bipartisan support when it comes to medical innovation. From gene therapies to targeted oncology, highly innovative assets tend to be viewed favorably from a legislative and regulatory perspective.

Companies we're watching: UnitedHealth Group (UNH), Eli Lilly (LLY), Acceleron Pharma (XLRN), and Danaher (DHR).

TECHNOLOGY

Robert B. Gray

Analyst, technology

A common belief is that only Biden would be negative for “big tech.” However, there is bipartisan support for regulation of businesses such as Amazon, Apple, Facebook, and Google. With internet regulation, many issues are at play, such as consumer data/privacy, the role of social media in elections, and free speech. In our view, the most significant regulatory risk is around competition, and anti-trust-related regulation could have negative consequences for large internet companies. However, we believe the path to comprehensive regulation will be long and complicated.

Cable: Rate regulation and net neutrality

For cable companies, a key area of focus is net neutrality. This is the principle that internet service providers must treat all communications equally, and they may not intentionally slow down, block, or charge for prioritization of specific types of online content. We fully expect Biden to push for reinstatement of the net neutrality rules overturned by Trump. The impact on cable companies would be immaterial, we believe, as they already largely abide by net neutrality principles.

A Biden administration could be more stringent, perhaps seeking to regulate pricing for internet service. In our view, however, this is a low probability event. For both the cable and internet industries under either administration, calls for regulation are not likely to result in significant near-term disruptions.

Companies we're watching: Charter (CHTR), Amazon (AMZN), and Alphabet (GOOG/GOOGL).

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