US election: A defining moment for markets?
With the political and economic ideologies of the Republican and Democratic candidates worlds apart, November’s US presidential election is the most significant in generations.
The outcome of US presidential elections has in recent times rarely been seen as a defining moment, either for the global economy or financial markets. However, this year’s contest has the potential to be far more significant, with Donald Trump arguably the most controversial candidate in living memory.
Risk aversion to rise; sell-offs in equities and rally in USD and fixed income
“It is difficult to gauge both the immediate and longer-term investment implications of a Trump victory. In the short term, we would expect to see risk aversion rise. That would likely result in a sell-off in equities, a rally in fixed income and a mildly stronger US dollar. Over time if his economic policy platform were passed by Congress, and his more extreme trade policy views shelved, we would expect to see higher inflation, a sharp increase in US government debt issuance, further dollar strength, while US rates would be expected to rise faster and the yield curve steepen.
The main risk from a Trump victory would be if his tax and spending plans were to get stuck but he carried through his threats on raising tariffs. With elevated uncertainty, no fiscal boost and a potential trade war, the US could quickly slip into recession, dragging the rest of the world with it.
Trump policies are a material risk to global economic growth over medium-term
A Trump victory could prove extremely destabilising and poses a material risk to global economic growth over the medium-term. It would be particularly damaging for countries with small open economies and larger emerging nations, especially Mexico.
In the past few months, the one asset that has been most closely correlated with Trump’s position in the polls has been the Mexican peso. Given his rhetoric towards both Mexican immigrants and manufacturing imports – exports to the United States account for around 30 per cent of Mexican economic output – the peso would likely be a big loser should Trump win.
Markets to remain calm if Clinton wins
Clinton’s policy stance is much more in keeping with the Democratic Party’s traditions. Her economic platform is mildly stimulatory, with some new programmes aimed at boosting productivity and improving the social safety net. Over the next two years, those plans are unlikely to impact growth sufficiently to change the course of monetary policy.
Given the relative continuity in policy likely under Clinton, we would expect financial markets to react in relatively muted fashion to her winning. US equities would likely receive a modest boost reflecting reduced political risk, while we would not expect much reaction in either the US dollar or Treasury bond market.
Equity markets: construction and infra set for boost; agriculture, hospitality and retail to suffer
That said, as far as the US equity and corporate bond markets are concerned, the election result potentially has some major ramifications for individual sectors. Trump’s proposed cut in corporation tax is potentially beneficial to all sectors if implemented, especially multinationals in the IT sector that hold large cash balances overseas.
Construction and infrastructure companies are likely to be the beneficiaries of a big increase in public spending whoever wins – Clinton has proposed spending $275 billion on infrastructure projects over a five-year period. We would expect spending to focus on areas such as highways, public transport and airports.
By contrast, sectors such as agriculture, hospitality and retail, which employ large numbers of low-wage workers, appear vulnerable regardless of the outcome. Clinton is in favour of a big rise in the federal minimum wage that threatens to push costs up sharply. While Trump is pushing for a smaller increase, his plans to curb illegal immigration threaten to boost labour costs further than he might wish.
Healthcare and energy stocks in the balance
Healthcare is another sector that will be in the spotlight. Healthcare reform is an issue both candidates agree is necessary but their proposed solutions differ. Clinton has been very vocal about ‘price gouging’ within the drugs industry: if she wins we are likely to see greater pressure on drug manufacturers to cut prices. But at the same time, since she has vowed to continue Obama’s Affordable Care Act, a Clinton victory should be good for health insurers and other healthcare services companies. By contrast, Trump plans to repeal the Affordable Care Act, which would be bad news for those same insurers and services companies.
Clinton is a strong advocate for renewables and tightening climate policy, claiming she wants the US to generate enough renewable electricity to power every home in America in the next ten years. Her policies will benefit the clean energy sector – particularly solar and wind. Trump, by contrast, is a self-declared “non-believer” in man-made climate change and has pledged to cancel the Paris Climate Agreement and scrap the Clean Power Plan, which was unveiled only last year. That would provide a boost to energy and coal stocks.
Michael Grady, senior economist and strategist at Aviva Investors