Election 2020 and implications for overseas stocks

Key takeaways:

• Investors are looking at the 2020 U.S. elections as a catalyst for changes to foreign policy and trade
• Two entrenched investment trends will remain in play regardless of the outcome: deglobalization and innovation
• These dynamic trends have increased the importance of international equities in investor portfolios

The outcome of the 2020 U.S. elections has potential to usher in major changes to foreign policy and trade.

Global investors are watching to see how potential turnover in the White House and Congress might affect investment risk appetite in the short term and, more broadly, sway performance of international financial assets over the long term.

The BlackRock Investment Institute believes that a victory by Democratic presidential nominee Joe Biden would likely signify a return to more predictable foreign policy and trade relations, even as it may also present some challenges for markets such as increased regulation and higher U.S. corporate taxes. More predictable trade policy could benefit export-focused economies including emerging markets. A second term for President Donald Trump, by contrast, would likely mean a continuation and perhaps doubling down of an “America First” stance on trade and immigration.

Regardless of the election outcome, the BII sees the U.S.-China rivalry staying structurally elevated, since there is bipartisan support for a more competitive stance on China.

For investors, two notable long-term trends are likely to be highly relevant to international equities well beyond the election: deglobalization and regional innovation.

Deglobalization: a structural trend

The coronavirus pandemic has had profound effects on global business operations and supply chains, ultimately accelerating the ongoing trend of deglobalization, which refers to a retreat in multinational trade and investment.

One result for investors has been the growing need to look internationally for global asset growth that was previously accessible by investing in domestic companies with robust multinational operations.

Figure 1: Global total trade volume declined since 2016

Source: Thomson Reuters, as of September 2020

Deglobalization is helping to upend assumptions about the role of international equities in portfolios. For example, the growing weight of companies in the consumer, healthcare and information technology sectors within U.S. equity benchmarks has come at the expense of sectors that are historically correlated with global growth, such as energy and materials. Investors should expect more divergent outcomes between the U.S. and international equity indexes, and they may increasingly need to look abroad in order to truly diversify equity returns.

Innovation is increasingly global

Short-term changes in domestic trade policies are unlikely to alter the trend for more innovation and entrepreneurship to take place on the global stage.

What are mature, established investment trends in the U.S. often still have room to accelerate from a lower starting point in less-developed markets, where local players can grow quickly. For example, growth in e-commerce has been significantly faster for leaders in Southeast Asia, where e-commerce penetration is still in the single digits versus teens in Europe, 27% in China and 18% in the U.S.[^1] As a result, both user growth and e-commerce penetration are gaining rapidly in the region, a trend accelerated further by the COVID-19 lockdown.

A growing middle class, coupled with developing infrastructure and increased numbers of skilled workers, can help generate significant growth potential for business innovations and new technologies. World-leading innovations are now coming outside of the U.S. in areas such as industrial automation, payments and renewable energy. For instance, the number of patents issued in China surpassed the U.S for the first time in 2019.[^2]  In Europe, robotics projects funded by Horizon 2020, a European Union research-funding program, have driven innovation efforts for robotic applications in areas including manufacturing, transportation and agriculture.[^3]

Figure 2: Rising influence

Source: IMF World Economic Outlook as of April 2020. Market cap is based on the MSCI ACWI Index as of September 2020.

Summing it up

Investors who are singularly focused on November to determine their international equity allocations may be missing structural shifts that should remain in play regardless of which party controls the White House.

The connectedness of global supply chains is in flux, and the epicenters for technological innovation are shifting. These trends will ensure that broad-based international equities will play an increasingly critical role in portfolios in the future.

Related ETFs:

• iShares Core MSCI Total International Stock ETF (IXUS)
• iShares Core MSCI Emerging markets ETF (IEMG)
• iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV)
• iShares MSCI China A ETF (CNYA)
• iShares MSCI Intl Quality Factor ETF (IQLT)
• iShares ESG Aware MSCI EAFE ETF (ESGD)

© 2020 BlackRock, Inc. All rights reserved.

^1. U.S. Department of commerce, Euromonitor, OC&C Strategy Consultants (as of December 2019).
^2. Clarivate Analytics (as of September 2020).
^3. The European Union (as of September 2020).