As we write this Sunday, global markets focus on the coronavirus. As we mentioned last month, this is expected and the current volatility should not come as a surprise. But this week will be dominated by something else: the US elections will take place this Tuesday. Mr. Trump said that they are the most important in history, but do they really matter for investments?
Well, undoubtedly, they do, for the short-term. To give you the color of our conclusion, it should have less impact on the medium-term. But in this very November, elections happen at a time when policy response is more important than ever given the pandemic’s resurgence and its impact on both economic and social context. Indeed, the electoral campaign has held hostage the critical topic of a US fiscal stimulus plan: it is unquestionably needed, and it would have been passed in any other circumstances. Alas, at election time, the benefits of blaming the other for doing nothing look more appealing than the risk of seeing the other taking credit. This impasse on stimulus combines with worrying developments of the virus to raise concerns over a possible double dip in economic activity.
Let us start with the worst one: contested results. The race is close, the turnout is historically high, and so is the proportion of postal voting, with different procedures and deadlines in different states. This limits the predictive power of polls, raises potential suspicions of fraud, and anyway requires more time to count results. Having a clear outcome on Wednesday early morning is not a given. However, one candidate could claim victory, triggering a dispute, which could ultimately only be solved by the US Supreme Court in early December. Markets would hate a month of uncertainty, especially as the fiscal stimulus would be delayed further and as the risk of violent social unrest would be material. Expect a peak in volatility, a severe correction in risk markets, and a probable rush to “survival assets”: Gold, certainly, Swiss Franc, Japanese Yen and US Treasuries, probably, and even cryptocurrencies, potentially.
The other two scenarios are both much better for markets. According to the polls, the most improbable is to see Mr. Trump being re-elected, and we will assume a split congress between Republicans and Democrats. The good news is that once the results are known, the US Congress will have no excuses to further delay a fiscal stimulus plan. Common ground for the two parties include enhanced unemployment benefits and infrastructure overhaul. Government spending will support the economy, limiting the risk of a double-dip, but it would be smaller than with Mr. Biden, and the agenda would combine tax cuts with an “America first” stance. The bold positions of Mr. Trump on the global stage would likely continue. Under this scenario, we expect US assets to outperform the rest of the world, starting with stocks, including domestic midcaps, but also the dollar, as well as Government bonds and gold as inflation expectations should not rise as much as with the jumbo Democratic spending plans.
The third scenario is the most expected, with an 80% probability according to the polls as we write: a double victory for the Democrats, taking both the White House and control of the Congress. This would lead to the largest fiscal stimulus plan ever in the US which, combined with a supposedly less aggressive stance in international relations, would boost the global economy. The agenda also includes a raise in both minimum wage and corporate taxes. We tend to believe that both cannot happen at the same time, and that the former could be replaced by more fiscal pressure on wealthy individuals. Climate change is another difference, with a plan to limit fossil fuels. Under this scenario, we expect a global relief on financial markets, with a leadership from non-US assets, especially Emerging Markets, also helped by a weaker dollar.
Anything can happen in an election, and our primary hope is that we will have a clear and accepted winner on Wednesday. But more importantly, if some of the 25 Phase III vaccine trials will be successful, whoever is the next most powerful man in the world, the medium-term picture should be broadly similar. Economic recovery will continue, helped by fiscal and monetary support, while interest rates should remain extremely low. This is not an adverse backdrop for risk assets, and everything else being equal, a material correction in the coming weeks could be considered as a potential buying opportunity for the longer-run.
Any opinions expressed in this article are the author’s own
Disclaimer: This article is provided for informational purposes only. The content does not provide tax, legal or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Read our full disclaimer policy here.
© Opinion 2020