A close look at this week’s trending topic, assessing policy differences ahead of US election day.

At the end of last week, President Donald Trump and Democratic challenger Joe Biden faced off in the final US presidential debate, which offered a more substantive policy discussion than the first round, with both candidates delivering strong performances, but offering few surprises.

A more measured Trump avoided the interruptions that marked his prior performance, instead pushing Biden to defend his multi-decade Washington record. Biden in turn critiqued the president’s pandemic response, and made the case for his own policy plans to rejuvenate the US economy.

Research indicates that presidential debates can nudge undecided voters in one direction, but that "candidate switching" among decided voters is less common. With some 60 million votes already cast, as of 25 October, there may be an even lower chance of changing voters’ minds in this election.

But while the debate itself may not move the needle on voting, it did serve to highlight a number of important policy issues for investors:

• Economic growth. Both politicians criticized each other’s respective pandemic positions and their potential (and actual) economic consequences, with Trump pushing for a wider reopening and warning of more job losses, while Biden vowed “to shut down the virus, not the economy.” But the future path for markets is now more contingent both on fiscal negotiations and on vaccine approval and distribution. We expect a vaccine to be widely available by 2Q21, and some form of fiscal resolution after the election. Markets have recently been revaluating the potential impact of the election. First, the polling lead of former Vice President Joe Biden has reduced market fears of a contested election. Second, the Democratcontrolled House of Representatives has already passed a USD 2.2 trillion stimulus package, which is indicative of the path the US government would take if Republican opposition is overcome. Although a Blue Wave victory by the Democrats, which is the most likely outcome based on recent polls, would likely lead to higher taxes and tighter regulations over the medium term, in the near term the proposed fiscal stimulus is leading to expectations for higher growth and inflation. Both factors have likely contributed to the recent rise and rotation in equity markets and increase in 10-year Treasury yields The Russell Value index is up 5.2% since the first debate on 29 September, following which Biden’s lead widened in the polls, while the Russell Growth index has only gained 3.5%. Meanwhile, 10-year US Treasury yields are up from 0.65% to 0.86% over the same period.
• Sustainable investing. Biden said that “climate change, global warming is an existential threat,” claiming his USD 2tr climate program would “create 18.6 million jobs” and boost sectors like electric vehicles. Trump defended his exit from the Paris Agreement on economic terms, arguing for protecting jobs in the US energy sector and ensuring US energy independence. We think a Biden administration would also focus on renewable energy, for example likely extending US solar tax credits and possibly easing tariffs on Chinese solar modules in a bid to increase domestic uptake. While a second Trump administration would not pursue a similar green agenda, sustainability indexes have performed well over the course of Trump’s presidency, and state laws are also influential in green regulation. More on how to buy into sustainability here.
• China. Both candidates found fault in the other’s China strategy, and worked to show a more adversarial posture toward China. We think a Biden administration would feature more predictable and less openly hostile policy toward China, benefiting export-sensitive sectors in Asia. Still, an increasingly bipartisan consensus on China in Washington may preclude major changes, and China's President Xi Jinping has also adopted a more confrontational stance. We expect US-China tensions to persist after the US elections, particularly in the technology space, where we see an ongoing move toward a more bipolar tech world.

These are all important threads for investors, and we have developed investment baskets to help navigate different outcomes. The UBS US Office of Public Policy sees the most likely election outcome as a blue wave (55%), followed by a Trump win with a divided Congress, i.e., the status quo (28%). Read more in our latest ElectionWatch piece "The home stretch." Election (and fiscal) uncertainty may continue to add volatility leading up to the 3 November election, offering entry points to establish long-term positions.

Looking further ahead, with ten vaccine candidates in late-stage trials globally and following encouraging early data, we remain confident that a vaccine will be widely available by 2Q21. We think that an end to US political uncertainty, combined with the passage of further US fiscal stimulus and sustainable improvements in mobility on the back of vaccine progress, will support the next leg of the equity rally over the medium term. Read more here on positioning for the upside.

Visit our website for more UBS CIO investment views.

Yesterday we explored the impact of the Chinese political agenda and the resumption of discussions between UK and EU. You can watch the video here:

Please visit ubs.com/cio-disclaimer #shareUBS