What can we expect from the US presidential election?
With a little over a week until voting day, the US elections are currently making headlines around the world. Under discussion - the possible outcome of the election and its impact on both the US economy and the financial markets. Andrea Siviero, Investment Strategist at Ethenea Independent Investors S.A. looks at some of the possible scenarios and what these might mean for investments.
On November 3ʳᵈ 2020, the American people will go to the polls to take part in both the US Presidential and the Congressional elections. In the latter, all seats in the House of Representatives are up for renewal, along with the election of approximately one third of the representatives in the Senate. While at this stage it is difficult to predict which of the main parties will win a majority in each of these elections, it is safe to say that we can expect differing market reactions depending on the combination of results. As this is an incredibly complex picture, and many aspects of the election could impact the financial markets and their different asset classes, in our view it is both difficult and risky to offer a forecast. However, there are several possible scenarios that warrant a closer look.
Markets have an aversion to uncertainty
While a change of President and a new administration may have short-term impacts on the markets, it will not fundamentally affect either the workings or the performance of the US economy. Over the past decades, we have observed that monetary policy has been the most important driver of US asset prices.
In the medium term, who actually wins the election is of less importance than their margin of victory. A clear result and (should Biden be elected) a swift change of administration is likely to be positive for both risk assets and the equity markets. However, the situation would become much more complicated in the event of an unclear result or a contested election. We are all aware that markets don’t like uncertainty, therefore the prospect of a vote recount, a potentially rigged election, the suspicion of foreign interference or Trump refusing to accept the election results are likely to negatively affect risk assets and benefit safe havens such as US Treasuries or gold.
Biden’s significant lead in the polls has recently gone some way to reassuring investors that we may avoid a contested result. However, as the last unpredictable elections have engendered a certain mistrust of electoral polls, we should not exclude the possibility of an electoral surprise.
The implications of riding the “blue wave”
A clear Biden win accompanied by the Democrats securing the Senate and keeping their majority in the House of Representatives (a so-called “blue wave”) would increase the chances of a significant stimulus package being approved rapidly. This would be positive for the equity markets and for other risk assets, such as corporate credit and, in particular, high yield bonds. It would also imply a larger deficit outlook and, as a result, an increase in Treasury yields. However, over the medium term Biden’s plan to increase corporate taxes, as well as to implement radical legislation and stringent antitrust measures, is likely to have a negative impact on both business and the equity markets.
The two sides of a Trump victory
On the other hand, a Trump victory combined with a divided Congress — the status quo and a political gridlock — would probably lead to little change in the markets. However, we could expect further doubts about the extent and the timing of additional fiscal stimulus measures to have negative repercussions for the equity markets over the short term. Over time, a second Trump presidency may continue to be relatively pro-business, including further tax cuts in the pipeline, and as a result would be supportive of equities.
On the international front, however, a Trump win will almost certainly lead to more trade friction and an escalation in commercial conflicts with China and the European Union. This is likely to be negative for the global economy and cause further market volatility.
Will the greenback retain its strength?
The forecast for the US dollar is even more complicated. Although the USD has been relatively strong during Trump’s presidency, it is difficult to gauge the effect the President’s increasingly confrontational approach with US partners and China, as well as the progressive withdrawal of the US from multilateralism and global engagement, will have on the greenback over time.
Moreover, the coronavirus pandemic and the economic policy enacted globally to manage its effects may well have a more important impact on the exchange rate than the result of the presidential election. Having said that, the past few weeks have shown that the USD remains one of the most relevant safe haven assets during times of crisis and uncertainty.
Positioning of the Ethna Funds
It is precisely because of this wide range of possibilities that, with regard to the election, we want to retain both our ability to act and our flexibility in the management of the Ethna Funds.
For the Ethna-AKTIV, this means that although, based on our positive outlook, we assume that share prices will tend to rise over the next three months, we are keeping the fund's risk ratio in neutral/slightly positive territory for the time being. This will allow us to use market setbacks, and the resulting attractive entry levels, for purchases. If there is no post-election contraction, we are also willing to buy into the rising market. We are confident that our currency and gold allocations put us in a good position prior to the election, and we are therefore refraining from making any major adjustments.
The bond-focused Ethna-DEFENSIV is conservatively positioned and we will continue to avoid equity investments in the run-up to the US elections. As the robust bond portfolio, which accounts for 85% of the total portfolio, focuses on carefully selected corporate bonds, we will not be making any further adjustments before the elections and expect stable positive returns in the future. Gold and the currency positions in the Swiss francs and Japanese yen should help to stabilise the fund, especially in the event of a negative scenario where the election results are challenged in court.
The upcoming US presidential election has virtually no impact on the allocation of the Ethna-DYNAMISCH. As previously noted, the long-term effects of elections are relatively limited, so that the strategic asset allocation of the fund is not affected. In selecting individual stocks, we focus on the fundamental trends of the underlying companies and generally try to keep the influence of binary political decisions as low as possible, so that there is no immediate need for adjustment. At a tactical level, the upcoming election is one of the many factors that will influence short-term decision-making, but so far we have seen little evidence that would require an adjustment of the current fund positioning.
Please contact us at any time if you have questions or suggestions.
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