[REFILE] PRIMER: Georgia Senate run-off races, 5th January 2021

WHAT’S AT STAKE: After no candidate took more than 50% of the popular vote at the November elections, Georgia’s run-off races for two Senate seats concludes on 5th January. The run-off will pit the incumbent Republican Senators David Perdue and Kelly Loeffler against Democrats Jon Ossoff and Raphael Warnock (the latter race is being referred to as ‘special’ since it is a vote to replace a Republican candidate out of cycle).

SENATE COMPOSITION: Currently, Republicans hold 50 seats in the upper house, and Democrats hold 48; the race will therefore be influential in setting the legislative agenda of President-elect Biden. If Republicans retain control of the Senate, Biden will face a split Congress for at least the first part of his term, limiting the ability of his administration to pass partisan legislation. If the Democrats take both seats, Senate would effectively be split 50/50, which would give Vice President-elect Harris a tie-breaking vote in the event of deadlock.

CONSENSUS: Polling is not giving a clear indication of how the race will play out. A Real Clear Politics poll average finds Democrat Warnock is leading Republican Loeffler by just 1.8 points at 49.8 vs 48.0, while Democrat Ossof is leading Republican Perdue by only 0.8 points at 49.3 vs 48.5 in the other race. Clearly both races are within the margin for error, and from a polling perspective, remain too close to call. However, there are questions about the usefulness of these polls; Politico reported that some of the most prolific pollsters have no plans to conduct pre-election surveys in Georgia, and polling has taken a back seat; the report said that strategists were leaning more heavily on absentee and early voting stats, along with the detailed results of the election held just last month. Betting markets are similarly providing little signal: Warnock (D) vs Perdue (R) is priced at 41c vs 38c, while the market for fewest votes in the Loeffler (R) vs Ossoff (D) race is priced at 59c vs 28c, implying an Ossoff win (there does not appear to be a ‘straight’ Loeffler vs Ossoff market on PredictIt). Citi's analysts have a bias that Republicans will win both seats (or at least one) and thus retain their Senate majority and the status quo of a split congress, though adds that the likelihood of split seats remains slim though, with most voters likely to err in favor of both party candidates given how symmetric candidate platforms are.

THE TRUMP DYNAMIC: While there is some scepticism that Democrats can take both seats, news that around 25% of the Republicans in the Senate and around two-thirds of Republicans in the House plan to challenge the outcome of the election on the 6th January certification vote in Congress is being framed by analysts as a negative for the chances of Republicans in Georgia, compounded by President Trump’s constant berating of officials in the Peach State, while challenging the legitimacy of the 2020 election. The prevailing wisdom is that these lawmakers’ efforts are motivated by personal ambition, and will not stop Congress’ certification of Biden as President. Nevertheless, despite the limited use of polls, this dynamic can be seen in the recent (thin) polling, where Democrats have appeared to perform ‘slightly’ better in the most recent polls.

ON THE NIGHT: Data shows a record 3mln early votes have been cast, at the final update on Friday, representing around 39% of all registered voters; these early votes will not be counted until election day itself. Like the national elections in November, analysts say that early voting will likely favour Democrat candidates, although on-the-day voting will likely favour Republicans. Accordingly, the initial vote tallies may lean in favour of Republican candidates, given that in-person voting is counted first, with Democrat votes ‘catching-up’ as the early votes are counted. If the November playbook is anything to go by, results will be due after 19:00EST/00:00GMT

IMPLICATIONS FOR MARKETS: If Democrats manage to take both seats (not a consensus view), some suggest that stocks might see some knee-jerk downside, as markets begin pricing in the prospects of higher corporation tax, and a potentially more activist regulatory approach, particularly against some of the concentrated large-cap names in tech. Names focussed on clean energy, infrastructure and higher rates, however, may benefit as Biden plans more fiscal support for the economy, which may entail heavy infrastructure spending. Some even make the point that were the Democrats to take both seats, any corporation tax hike would not be immediate, and would likely be gradually introduced, mitigating some of the short-term impact. From a more medium-term lens, some analysts have noted that the fiscal impulse and the normalisation from pandemic conditions, along with an accommodative Fed, may make dips attractive, particularly in the value/cyclical names. 

05 Jan 2021 - 07:20- EquitiesResearch Sheet- Source: Newsquawk