SYZ: Clinton or Trump – key market & asset class implications
A sharp divergence does not bode well for governance, regardless of who wins the election. In case of a Clinton victory, and in a context of a Republican-controlled or divided Congress, there is a risk of continuous investigations and possible future impeachment. If Trump loses he may also not accept the result, creating further political upheaval.
Trump would be a return to protectionism
US companies might suffer from protectionist measures if global trading partners react to new tariffs under a Trump administration. Emerging markets may prove vulnerable, as exports make up about 23% of GDP with a majority going to the US (18% of exports). Any sudden swing in the US trade deficit would most likely strengthen the US$, which has never favoured EM equities.
With all of this in mind, we analyse the impact on key asset classes, rates and sectors.
Both candidates are planning to increase government debt with projection tilted higher in the case of Donald Trump’s election. Hence, we will likely see an increase of Treasuries issuance (increase supply) and upward pressure on the long-end of the US curve.
Emerging markets corporate
Clinton does not support the Trans-Pacific Partnership in its current form and has also raised questions about the benefit of free trade. However as long as the USD does not appreciate sharply EM debt should continue to be a source of yield. A Trump victory could add volatility and lead to a weaker USD given his protectionist stance. Exporters to US should be hit, particularly Mexican names. EM corporate debt with strong domestic exposure could escape the storm.
US high yield
Clinton – modest and gradual FED rate hikes should remain supportive for high yield. In the event of a Trump win as equities and high yield have historically strong correlation, high yield may suffer post-election.
FX and commodities
In the event of a Clinton win, the Mexican Peso should recover from the recent loss against the USD. The overall market should get back to normal and return to a lower level of volatility. A Republican win under President Trump should mean safe haven currencies like the JPY and CHF should continue their appreciation against USD as well as Gold and Silver. On the contrary, commodity currencies like CAD and AUD should depreciate as well as emerging ones (eg: MXN, BRL).
Clinton is a neutral for rates as volatility will be contained. Interest rates will rise gradually and are unlikely to disrupt current monetary policy. Meanwhile, a sell-off in equity markets may lead the Federal Reserve to delay December rate increase and adapt its speech.
Energy & pharmaceuticals
A Clinton victory could be unhelpful for healthcare stocks, given her ongoing concern with drug pricing. Yet it is not new to the market and a large part may be already discounted in the share prices). On the other hand, a Trump victory might potentially be positive for energy and or utility stocks as environmental burdens may be partially lifted.
Yasmina Barin, analyst, advisory team at SYZ