What could the US election mean for credit?

October 9, 2024

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With the US presidential election drawing near, what could be the impact of a Republican or Democrat victory on credit markets?

As we begin the final quarter of 2024, attention on the US Presidential election continues to intensify, with latecomer candidate Kamala Harris locked in what looks set to be a close contest with Donald Trump.

The period either side of an election is often volatile as market participants assess the potential outcomes and their impact on financial assets. Here, our CEO and portfolio managers discuss what a Democrat or Republican victory could have on US and emerging-market credit.

The big picture

Justin Muzinich, former US Deputy Secretary of the Treasury

Our focus as credit investors is on fundamental analysis. We do not try to time the market. Our primary goal is to lend money to good companies with the ability to repay. However, the winner of the US election is likely to have a direct impact on the US economy and, indirectly, credit markets.

A Trump administration would likely result in a more growth-focused agenda with lower taxes and lower regulation, including in the energy and financial sectors.

A Harris administration would likely look at higher taxes, tighter financial and other regulations, and a focus on renewable energy.

At the same time, we could see bipartisan support on certain issues – for example, both parties will likely want to prevent the transfer of certain technology to China and to hold China accountable for historic trade practices.

However, the US has significant levels of national debt and a large deficit (c. 6% of GDP),¹ which are likely to constrain government flexibility, regardless of the election outcome.

Dollar strength

Despite the fiscal situation, we believe the US dollar’s status as the world’s reserve currency will continue, regardless of who wins. The dollar’s strength derives from the underlying robustness of US institutions: the world believes in the judicial system and independence of the central bank, checks and balances on the government, and the free market. These are all unlikely to change, irrespective of which party is in office.

US credit: public markets

Bryan Petermann, Kevin Ziets (US high yield) and Anthony DeMeo (US investment grade)

As long-term investors, we look through the immediate impact of an election. Nevertheless, presidents tend to implement polices that affect certain sectors. While we believe US credit markets are likely to feel little impact at a broad level, we could see differentiation at a sector and issuer level depending on policy.

Trump victory

A Trump victory would likely benefit domestically oriented sectors such as energy (production and distribution), utilities (lower subsidies for renewables would limit expansion and support pricing for traditional utilities), real estate, pharmaceuticals, domestically focused industrials and M&A-focused companies (due to a looser regulatory environment).

Industries that could be negatively affected include those hit by tariffs or regulatory oversight (for instance, technology with strong China links). Healthcare could also be volatile if Republicans look to overturn the Affordable Care Act.

Harris victory

A Harris administration would likely pursue a very different policy agenda. Energy could be hit given the potential for a limit on oil and gas drilling permit rights, while a greater focus on climate change could benefit renewables and carbon reduction technologies. We could also see a boost to new and existing home sales from first-time homebuyer credit. The broader healthcare sector would also likely benefit given Harris’s support of the Affordable Care Act.

We could see higher corporation and personal taxes, and an increase in capital gains tax. Benefit spending may also rise. Under such a scenario, we anticipate industries such as clean energy and housing being among the beneficiaries, while energy, autos, defence and pharmaceuticals (due to price caps on certain drugs) could feel a negative impact from policy changes. Additionally, financials could be hit with tighter regulations.

Portfolio impact

We may increase our exposure to cyclical/domestically oriented sectors in the event of a Trump win and more defensive/global sectors if Harris wins. Perhaps most importantly, given our focus bottom-up, fundamental analysis, we will look to deploy capital should election-driven volatility hit valuations of strong businesses.   

A unified government of either party would result in higher deficits (and steeper rates curve) than under a divided government (flatter rates curve/tighter fiscal policy). It may also have a short-term impact on rates, but this will likely be balanced by the longer-term growth outlook. Trade policy uncertainty would also likely benefit the long end of the US Treasury curve as investors seek safety in longer-duration assets.

Impact on spreads

There is a common misconception that credit spreads widen around election time. However, as Figure 1 highlights, this has only happened twice in the last 25 years – when the dotcom bubble burst in 2000; and in 2008, at the height of the global financial crisis. Other periods showed tightening in the two months before and four months after the election. 

Figure 1: US high yield spread changes before and after US elections since 2000

Source: ICE Index Platform and Muzinich views, as of August 31, 2024. ICE BofA Cash Pay US High Yield Index (J0A0). Index used represents best proxy to show changes in US high yield markets. Periods chosen selected as the time periods most likely to be impacted by US election: potential volatility and speculation in run up to event (2 months prior) and time when policies of new administration have started to have an impact (4 months following). For illustrative purposes only.

US private credit

Michael Smith, co-head of US private debt

The US election outcome could have a direct impact on certain sectors of the US economy. At a high level, private credit sectors likely to benefit/be impacted by a Trump/Harris victory are akin to public markets. However, the impact of each candidate’s policy on inflation is our key concern, given the knock-on effect on interest rate policy. For direct lending, we are focused on two potential outcomes.  

Rising inflation could have a negative impact on existing loans as they deal with higher base rates, leading to liquidity/restructuring challenges. However, this would benefit new loans as they factor in a higher base rate, creating strong risk/reward opportunities.

On the other hand, if inflation continues to fall, private credit is likely to resume its upward momentum, albeit with lower overall returns for the same level of risk.

As the election approaches, it is largely business as usual for US private debt. Many companies are looking for minimally dilutive growth capital as banks have reduced their ability to support small and medium-sized business.²

Some business owners are in ‘wait and see’ mode. This is different to prior election cycles where owners were quick to transact before the election, or shortly thereafter, for fear of higher taxes. With the current slate of candidates and potential for tax cuts in the event of a Trump victory, many owners are waiting for the election outcome before transacting.

Emerging-market corporates

Warren Hyland, portfolio manager, emerging markets and multi-asset credit

Going into the election, we could see some short-term volatility in EM credit, although the overall effects on fundamentals are likely to be limited. Further down the line, as the new administration gets up and running, policy initiatives could have an indirect impact on certain sectors.

Given a focus on protectionism and supply chains, a second Trump term could hurt EM corporates in countries with strong trade links/exports to the US, including China, in sectors such as consumer goods, autos and semiconductors/technology. Yet any decoupling from China could also prove beneficial to corporates in other EM countries as the US diversifies supply chains and changes its foreign direct investment approach.

Oil and gas corporates in Brazil and the Middle East could benefit on the back of Trump’s fossil fuel advocacy, while the potential for large-scale infrastructure projects could increase demand for raw materials and construction-related goods, benefiting metals and mining and cement producers.  We could also see a stronger US dollar due to deregulation and fiscal stimulus, which may hit corporates with US dollar-denominated debt.

Meanwhile, with Harris’s likely focus on boosting the green economy, sectors linked to renewable energy could benefit, such as solar, wind and hydropower, green manufacturing technologies and batteries/electric vehicle production. This theme could also extend further to include climate-focused infrastructure projects, which would boost construction and infrastructure. With Harris’s support for healthcare reforms, EM pharmaceutical companies could also benefit, as may retail/consumer goods that may be boosted by wider trade policies.

 

References

1. Statista, ‘Budget balance and forecast of US government 2000–2034, as of December 31, 2023. Latest available data used.
2. Federal Reserve, ‘Senior Loan Officer Opinion Survey on Bank Lending Practices – July 2024’, August 5, 2024

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Important information

Muzinich and/or Muzinich & Co. referenced herein is defined as Muzinich & Co., Inc. and its affiliates. Muzinich views and opinions.  This material has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity.

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