Last week was one most global share markets will gladly put behind them.
Soaring COVID infections across the United States and Europe coupled with uncertainties in the US election outcome saw many investors hit the sell button.
The S&P 500 Index (INDEXSP: .INX) lost 5.6% over the 5 trading days. And tech shares, many of which quickly rebounded from the March lows to hit new all-time highs, weren't spared. The tech-heavy Nasdaq Composite (INDEXNASDAQ: .IXIC) shed 5.5%.
All up, it was the worst week for US shares since the heavy selling abated in late March.
European share prices were hammered too, as nation after nation – including France, Germany, and the United Kingdom – moved to implement strict lockdown measures that may last through Christmas. Germany's DAX PERFORMANCE-INDEX (INDEXDB: DAX) dropped 8.6% over the week.
By comparison Australian shares did relatively well, though the S&P/ASX 200 Index (ASX: XJO) hardly emerged unscathed, finishing the week down 3.9%.
ASX tech shares weren't spared either. The BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC) – an exchange traded fund holding some of Australia's largest and most innovative tech companies – fell 4.3%.
ATEC is falling again today, down 1.5% in afternoon trading, while the ASX 200 has reversed its early morning losses and is up 0.4%.
All this points to another volatile period ahead in a week that brings us the US Congressional and Presidential election, the Reserve Bank of Australia's next rate cut and quantitative easing (QE) decision, and more news – good or bad – on the coronavirus pandemic.
With many investors on edge this week, let's have a look at some of the leading market experts' views on what they expect.
Will the US enter economy crimping lockdowns like Europe?
Under the leadership of Donald Trump, the US has so far opted not to order lockdowns on a national level. But Joe Biden, should he get the keys to the White House, may steer a different course.
Addressing that uncertainty, Matt Sherwood, Perpetual's head of investment strategy, is quoted by the Australian Financial Review (AFR) as saying:
Everyone's questioning whether Europe is a canary in the coal mine for what's ahead for the United States. We have seen big lockdowns in the UK, in Germany, in France, in Spain, but also in smaller economies like Austria, Greece and Portugal. And now people are looking to the other side of the [Atlantic] and saying, 'OK, what's going to happen with the Americans?' …
If Biden and the Democrats do get a clean sweep, they will have a higher tendency to close the economy down, so all of a sudden the markets' assumptions about their recovery, about growth, will be thrown into question.
If the world's biggest economy raises taxes, what happens to ASX share prices?
It's not just how a new administration in the US may deal differently with the pandemic.
There are a range of potential changes coming to US corporate, private, and capital gains taxes that could impact the share prices of many ASX shares.
Biden has previously indicated the Democrats would move to increase the long-term capital gains tax for people making more than US$1 million (AU$1.4 million). And they're likely to increase the corporate tax rate – slashed by Trump early in his presidency – to 28% from the current 21%.
That could have a big impact on Australia's US investments. Even if you haven't bought any shares yourself, your super fund most likely has. According to the United States Studies Centre, about 20% of Australia's total superannuation investments (more than $500 billion) are invested in the US.
Betsy-Ann Howe is an international tax partner at K&L Gates, the top US law firm in Australia. Commenting on a Biden victory, Howe says (as quoted by the AFR):
For Australian investors, the main areas of concern will be the increase in tax rates for corporates and individuals and some of the changes to business taxes. Biden's plan does refer to "eliminating certain real estate tax provisions", which suggests that changes are likely. This may include the ability to offset income with active losses from real estate activity.
Given the myriad of considerations necessary for Australians making such investments – whether individuals, companies, superannuation funds or privately managed funds – and the substantial Australian investment in US real estate – whether residential build-to-rent, infrastructure or commercial – this will be an area of continual scrutiny for Australian investors.
This will have a significant impact on decisions relating to cross-border investment from Australia into the US.
Not everyone believes higher US taxes would be detrimental for Australia's markets or economy. AMP Capital chief economist Shane Oliver, for example, said:
[Mr Biden] would probably be the best outcome for Australian shares and the Australian dollar as Australia would benefit from more US stimulus. Our companies would be relatively more attractive with a higher tax rate in the US and we would likely see less tensions with China.
Then there's Fundstrat Global's Tom Lee. As quoted by the AFR, Lee is bullish on share markets, even in the case of a contested election:
If this happened, we believe the Fed would intervene. In other scenarios, we see fiscal stimulus moving forward with the same Fed backstop. So, the odds heavily favour a rally post-election. In short, while people are sitting on the sidelines into election day, we see a rally taking root thereafter.
Two ASX 200 shares that have a significant exposure to US markets are property and infrastructure group Lendlease Group (ASX: LLC) and cement building products supplier James Hardie Industries plc (ASX: JHX).
Year-to-date the Lendlease share price remains down 31%. James Hardie's share price has regained all its COVID-driven selling and is up 26% so far in 2020.
As for the RBA?
Of all the uncertainties facing ASX investors this week, the RBA's decision tomorrow on an interest rate cut comes in near the bottom, with almost unanimous consensus among analysts that a final small cut is coming. The only question remains the size of its QE program.
According to Perpetual's Matt Sherwood:
The RBA has done everything they can bar place ads in the paper that the cash rate is going to be lowered on Tuesday, so that won't surprise the market. If the RBA delivers an asset purchase program above expectations, then Australia would outperform during what is going to be probably a pretty volatile period to the end of the year.
There you have it.
If you started this week feeling a bit uncertain about the short-term direction of your shareholdings, you're not alone.
But regardless of who wins the US election, the longer-term outlook for Australia – which recorded another day with zero new coronavirus community infections – and ASX share prices remains strong, in my view.
