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PIMCO picks credit winners and losers from potential US election outcomes

Renewable energy and construction credit sectors would be among the winners in a Democrat sweep in the U.S. election, whereas financials and homebuilders would benefit from a prevailing of the status quo, according to PIMCO, one of the world's largest bond fund managers.

The two most likely election outcomes are either a Democrat sweep of the White House, House of Representatives and the Senate, or the status quo, with President Donald Trump starting a second term with Congress split between the two parties, according to Libby Cantrill, head of public policy at PIMCO, and John Devir, portfolio manager and head of Americas credit research.

With $1.92 trillion in assets under management, PIMCO is the world's 10th-largest investment manager. Its Total Return fund has been the world's largest actively managed bond fund for much of the past two decades.

Should Joe Biden ride a blue wave into the White House, PIMCO expects a boost to physical infrastructure such as bridges and roads, as well as a national build-out of broadband and climate-friendly buildings and schools, in line with Biden's proposed four-year, $2 trillion green infrastructure and energy plan.

READ MORE: Sign up for our weekly election newsletter here, and read our latest coverage here.

PIMCO calculates that the shift to a climate-friendly regulatory framework, which includes a plan to achieve carbon-free power generation by 2035, would be a boost to the renewable energy sector, while the chemicals industry and oil and gas exploration and production would lose out, "particularly firms exposed to drilling on U.S. federal lands, both onshore and offshore."

Biden's plans to strengthen the Affordable Care Act and reform drug pricing to lower costs to make healthcare more affordable are seen as a boost for hospitals but a drag for healthcare and pharmaceuticals companies.

PIMCO expects credit markets to go through a volatile period in early November should the Democrats sweep the election, with financial markets initially pricing in higher taxes.

"This could be problematic for equity and corporate credit markets currently trading at above-average valuation multiples," said Cantrill and Devir. However, tax changes by a Democrat-controlled Congress would be "more evolutionary than revolutionary," they said.

Lack of policy increases uncertainty if Trump wins

The winners and losers are less clear in the case of a Trump second term with Democrats maintaining the House and Republicans keeping the Senate.

"Trump may try to pass a tax bill, but that will be dead on arrival in a Democratic House. Mostly, we expect a continuation of the lighter-touch regulatory environment, especially around traditional energy, financial institutions, and telecommunications," Cantrill and Devir wrote.

The fossil-fuel-friendly policies of Trump's first term did little to boost traditional oil and gas companies, which are not favored by an increasingly ESG-aware investor environment and have been hit by a slump in oil prices, with capital instead being drawn toward renewable energy and electric vehicles.

PIMCO noted the possibility that a small infrastructure bill, made possible by bipartisan support, would be a boost for homebuilders, while a renewed attack on the Affordable Care Act with the Supreme Court overturning parts of the law is seen as a potential positive for healthcare and pharmaceuticals companies.

The outlook is more mixed for sectors such as technology, with supply chain sub-sectors exposed to developments in China-U.S. relations, which have been increasingly strained under the Trump presidency.

"We believe a Trump victory and divided Congress would be slightly positive for credit markets, as it would reduce uncertainty, and current tax policy would remain in effect. Still, this would be somewhat offset by Trump’s combative foreign policy, particularly with China," Cantrill and Devir wrote.