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How can the US navigate net zero with a divided government?

UBS Wealth Management and BlueBay Asset Management outline possible investment paths


Elena Johansson

Some observers believe that it could become difficult for democrats to achieve a majority in the senate in the US election, which would hinder any net zero carbon emissions plans of the nation.

Expert Investor talks to strategists at BlueBay Asset Management and UBS Wealth Management about the investment implications of a split US government and how it could hamper president-elect Joe Biden’s clean energy plans.


Q: How should EU investors position their portfolios if they assume that the US will pursue a net zero emissions target by 2050 but without a majority of democrats in the senate?

David Riley, chief investment strategist at BlueBay Asset Management, said: “A split congress with the Republican Party retaining control of the senate will make it more difficult for president-elect Biden to enact in full his policy agenda, including his ‘green plan’. It will be difficult to pass legislation through a divided congress, to set milestone targets and enforcement mechanisms and realise his stated goal of a 100% clean energy economy and net-zero carbon emissions no later than 2050.

“But there are actions that a president Biden can take, including the US re-joining the Paris Climate Accord, which makes an international agreement on a new emissions-reduction pledge for 2030 more likely.

“Through executive orders, president Biden can reverse some of the de-regulatory actions taken by the Trump administration, including setting methane pollution limits for new and existing oil and gas operations, require federal government procurement to favour clean energy and support the action taken by states such as California on zero-emission vehicle rules.

“The 180-degree shift on environmental and climate change stance under a Biden administration is negative for a carbon-based energy sector, but is a positive development for many European companies that are global leaders in energy efficiency, clean transport (smart mobility) and renewables.

“The outcome of the US election will reinforce the shift towards sustainable investment, including amongst US investors that currently lag well behind European investors in terms of the adoption of environmental, social and governance (ESG) principles.”

Kiran Ganesh, a multi-asset strategist in the UBS chief investment office for global wealth management, said: “Overall, we think the prospects for the market in light of a Biden presidency and a divided congress are good. We expect more predictable foreign policy, some additional fiscal stimulus, alongside a likely status quo on tax and regulatory policy.

“The re-joining of the Paris Agreement is an important statement about the beliefs and values of the new administration; however, we think it unlikely that it will translate into meaningful changes in policy due to the divided congress.”


Q: What type of stimulus package do you expect and how should EU investors prepare for it?

UBS’s Ganesh: “We estimate that a stimulus package in the region of $500bn to $1trn, or 2.5% to 5% of GDP, is likely. Although this is less than the more than $2trn expected in the case of a blue wave, we still think it is positive for the US economy and should support more cyclical companies relative to defensive ones.

“Cyclical parts of the market we like in particular include mid-caps, industrials, consumer discretionary, and select financial and energy names.”

BlueBay’s Riley: “A divided US government does imply a meaningfully smaller fiscal support package than under a so-called ‘blue wave’ of democratic control of the congress as well as the White House.

“Nonetheless, I do expect a fiscal package towards year-end or early in 2021 of around $1trn (€846bn), as the republican senate leader has already indicated a willingness to strike a deal and there are areas of agreement for example on extending loans to small businesses to protect jobs [the Paycheck Protection Programme or PPP].

“While a fiscal package will be supportive of the US and global growth, a smaller fiscal stimulus does imply that the Fed will continue to keep monetary policy ultra-easy for even longer and place downward pressure on the US dollar.

“For European and global investors, some fiscal stimulus, continuing Fed liquidity and less ‘trade war’ risk under a Biden presidency is positive for the euro and especially emerging market assets.”


Q: What type of net zero pathway do you expect the US to take? 

BlueBay’s Riley: “It is difficult for investors to precisely anticipate the net zero pathway the US will take, especially as there is a possibility that the Democratic Party will gain control of the senate if they win two Georgia seats in run-off elections on 5 January or in congressional elections in two years’ time.

“Nonetheless, the US is more likely to pursue a path that emphasises investment in clean technology rather than active measures to shrink the fossil fuel sector, which remains an important provider of jobs.”

UBS’s Ganesh: “It looks unlikely at this stage that we will see significant changes in regulation, given that a republican senate would likely oppose significant ‘green stimulus’ or significant curbs on fossil fuels.

“Nonetheless, we continue to see green tech as a very attractive longer-term theme. In a global context, Europe, China, and Japan have all pledged to go carbon neutral by 2050/60, and their combined economies are larger than the US.

“And, even in the US, the question of clean energy vs fossil fuels is not just about government policy anymore. Economics speak in favour of clean energy too.

“In many cases, solar PV and onshore wind are now already the cheapest sources of new-build power generation, and it is worth noting that the largest renewable power developer in the US is now the country’s largest ‘energy’ company by market capitalisation, even without additional federal regulatory support.”