Street riots, buyback crackdowns on investor watchlist ahead of US Election

Australian company share buybacks have skyrocketed past $10 billion this year, as boards tap equity markets to shore up balance sheets against the pandemic onslaught.

Troubled financial institution AMP flagged a potential $200 million buyback in recent weeks; National Australia Bank launched a $3.5 billion capital raise in May; and mining giant Rio Tinto raised $2 billion from an off-market buyback in late 2018.

But these pale next to the eye-watering buybacks of US markets, which totalled more than US$89.7 billion in the second quarter of 2020 alone. These capital raising initiatives were lashed by US President Donald Trump in the build-up of his US Election campaign, unhappy that companies are supposedly abusing their 2018 tax cuts.

Trump has said he would not oppose rules restricting the likes of Boeing – which raised US$25 billion in a massive bond raise in the first quarter – from buying back shares with the cash boost from congress.

But if the Democratic Party wins office in November, buybacks are squarely in its sights.

“The Democrats argument is that the enormous sums of corporate cash devoted to stock buybacks come at the expense of investment in worker wages, company growth, capex and that it’s part of a system that helps boost stock prices and executive compensation,” said Capital Group political economist Matt Miller during a webinar last week.

“It doesn’t matter about the merits of that argument – it will inform what Democrats do on buybacks, and I think it will try to vote via regulatory action and legislation to place stricter conditions in limiting buybacks.”

This is one of a raft of flagged policy changes concerning investors if Democrats win the overall election or retain control of the Senate: “In terms of policy changes, that will impact everything,” Miller said.

“Biden would reverse Trump’s deregulation on everything from energy to banking, telecom, and climate.”

He notes that the battle for the US Senate sits on a knife-edge, with Republicans holding just a 53-47 majority as of mid-October. This metric has been an almost infallible predictor of overall US election results over the last 15 or 20 years, “particularly as America has become more partisan and polar.”

He also suggests the plans already laid out by Democratic presidential nominee Joe Biden – softened during a “truce” with former nominee Bernie Sanders during the run-off – is far from locked-in.

“If Democrats sweep , that entire agenda will be renegotiated the next day.”

Three other key areas he thinks investors need to keep an eye on are:

1. Corporate taxes would rise incrementally – from 21% to 28%, which would take a bite out of US company earnings. A rise in personal income tax will also hit wealthy US citizens.
2. A comprehensive pro-labour agenda, including a higher minimum wage that would be phased in; legislation making it easier for unions to organise; and new states brought to the union – Washington DC & Puerto Rico.
3. The prospect of civil unrest – which Mills was becoming concerned about even before COVID struck – if Trump wins again without a landslide popular vote victor

It’s this final point that sends shivers through the spine, especially after the recent rolling protests across several US States.

“The idea that a majority cannot determine political outcomes in the US will increasingly become unacceptable – we’ve already seen people’s muscles flex when it comes to civil unrest, as we saw in the awful George Floyd killing, which investors need to bear in mind if Trump can pull it out.” 

Asia Pacific webinar: Post US Elections: What's next?

Immediately after the US presidential election on 3 November, Vice-Chairman of Capital Group International, and former Australia ambassador to the U.S. Michael Thawley, will share his insights on the latest status of the election results, what's next, and the potential implications in terms of geopolitics and the economy. Register here.

This webinar is suitable for Professional Investors