The Democrats have delivered a sweeping victory in the US mid-terms, taking control of both the House of Representatives and the Senate and making significant gains in traditionally Republican territory.
The result changes the balance of power in Washington for the remaining two years of Donald Trump’s presidency, with important implications for markets, US infrastructure spending and sustainable investment.
Charlie Thomas, Chief Investment Officer
Key takeaways
- Sentiment could improve: the scale of the Democratic victory may begin to shift market and political perceptions, with early strength already visible in areas such as renewable energy.
- Politics is only part of the picture: energy prices, the debt ceiling and AI remain significant near-term market drivers, regardless of the changing political backdrop.
“The mid-term result has changed the political backdrop, but it does not, at present, change the fundamentals for sustainable investing. It is also worth remembering that the balance of power does not formally shift until January. In the meantime, there remains a risk that Republicans use their remaining time in control to pursue regulation against sustainable investment and related themes.
Where we could see a more immediate impact, however, is in investor sentiment. We have already seen a strong response in parts of the renewables market, including for sustainable energy companies in Europe and the US. This indicates that investors are reassessing the political backdrop for the sector and starting to reduce the US political discount.
The scale of the ‘blue wave’ is difficult to ignore. For us, though, the investment case has never rested on politics alone. Renewables are increasingly among the cheapest and fastest sources of new generation capacity to bring online, as well as being emissions-free. That matters in an environment of high energy prices, multi-year backlogs for new gas infrastructure and rapidly rising electricity demand from areas such as data centres.
So, the mid-terms may create a more supportive backdrop for sustainable investment, but we should not confuse a political shift with a change in the fundamentals. Markets still have to contend with energy prices, the debt ceiling and the outlook for AI, among other issues. Politics can change the direction of travel, but ultimately, it is the economics underpinning the transition that matter most for investors.”
David Osfield, Fund Manager of the Sustainable Global Equity Fund
Key takeaways
- Greater scrutiny of AI infrastructure: the result could lead to tighter oversight and permitting constraints around the rapid build-out of US data centres and associated infrastructure.
- Potential benefits for sustainable industrials: a slower pace of AI infrastructure development could ease competition for labour, materials and power, reducing inflationary pressures and bottlenecks for solutions-oriented companies.
- A broader shift could be emerging: changing politics, the prospect of renewed climate and infrastructure policy ahead of 2028, and potential geopolitical de-escalation could broaden market leadership beyond technology and AI.
“The scale of the mid-term result could prove to be a positive clearing event for markets. There has been considerable policy uncertainty and, while plenty remains unresolved, the Democratic victory provides a clearer political signal. The result implies that political anti-ESG rhetoric may have peaked, although the policy consequences are likely to unwind more slowly. ESG may re-emerge, but it will likely be a narrower, more financially disciplined version of its broader 2020-21 form.
Texas is particularly interesting. It has been at the heart of the US data-centre boom, but the result points to growing public unease around the pace of AI expansion. The industry has not always been effective at communicating the benefits of AI, while the demands its rapid growth is placing on power, infrastructure and local resources are becoming increasingly visible.
We would therefore expect a Democrat-controlled Congress to bring greater scrutiny to AI infrastructure development, particularly around planning and permitting. We don’t believe this will derail the AI investment cycle, but it could slow the pace of development and temper some of the upside expectations around the ‘picks and shovels’ of the AI trade.
For sustainable investors, there is another side to that story. AI infrastructure has intensified competition for labour, materials and power. A slower build-out could relieve some of those pressures, creating more breathing room for solutions-oriented industrial businesses competing for the same resources. Xylem is a good example. Its work tackling challenges such as water scarcity and resilience requires many of the same resources being pulled towards major datacentre and infrastructure projects. Less competition for those resources could ease cost and capacity pressures and create a more supportive operating environment.
The interest-rate picture is more complicated. Greater Democratic spending could put upward pressure on longer-dated bond yields, while an easing of infrastructure constraints could begin to alleviate shorter-term inflationary pressures. That combination could prove more constructive for parts of the industrial and sustainable investment universe that have interest-rate sensitivity.
Then there is 2028. If the Democrats carry this momentum into the presidential election, markets could begin to price in the possibility of renewed support for climate policy and sustainable infrastructure well before voters return to the polls.
Taken together, we could start to see a shift in the conditions that have shaped markets in recent years, potentially opening up opportunities beyond the technology and AI-related areas that have led for much of that period.”
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