The too-close-to-call race in the US presidential elections is the worst possible outcome for investors as it will make it difficult to implement an effective stimulus package for the economy, according to asset managers.
We should bear in mind the persisting uncertainty around the elections will not only affect financial markets, says Kristina Hooper, chief global market strategist at Invesco. ‘Our main concern is social unrest. If this scenario unfolds, I would not be surprised to see a sell-off in more risky assets.’
Paul Jackson, global head of asset allocation research at the Atlanta-based asset manager, is already seeing the first signs of this. ‘In the first phase of the counting process, in which Biden took the lead, stocks and gold were down. When doubts increased and Trump made a comeback, both recovered. Now that there is more uncertainty again, the rally has faded. It seems markets have more confidence in Trump.›
Biden’s plans to raise corporate taxes and also raise the minimum wage may be viewed negatively by the markets, Jackson believes. ‘Sectors like oil & gas and pharmaceuticals will also get tougher under Biden’s plans than under Trump. Although Biden did not say anything specific about big tech in the campaign, here too it is to be expected that the current tough regulatory environment will continue.›
The current uncertainty will be good for gold in the short term, according to Jackson. For equities and real estate, as well as high yield and emerging market investments, on the other hand, the uncertainty will be a negative.
Robeco
Fabiana Fedeli, Robeco’s global head of fundamental equities, emphasises that the elections are by no means a done race and it may take until Friday before there is a clear outcome. ‘Until then, we can expect markets to be volatile and to act on news of election results,’ she says.
Looking at equity markets, a divided Congress would be the least desirable scenario, Fedeli believes. ‹Regardless of who wins, this would mean a delay in the implementation of a much-needed stimulus package in the short term.›
Blackrock
According to Blackrock, the absence of a ‹blue wave›, the scenario whereby both the House of Representatives and the Senate would fall into the hands of the Democrats, will lead to more of the same on the stock markets. The healthcare and technology sectors, already the big winners of 2020, will continue to outperform, expects Tony DeSpirito, chief investment officer Fundamental US Active Equities at the asset management company.
‘Because we are likely to have a divided Congress, I don’t expect big changes in tax rates, not much new legislation and not much budget support either,’ DeSpirito said in a call with clients.
‘The valuations of healthcare companies have recently remained fairly favourable for fear of new legislation [of the Democrats] that could affect their profitability›, he says. But this fear now seems unfounded.
In addition, technology stocks may benefit if there is indeed no substantial stimulus package. DeSpirito: ‹As a result, the technology sector remains one of few spots where growth can still be found, and investors will be willing to pay for it.’
On the other hand, the absence of the expected clear victory for Biden is bad news for cyclical and ‹green› stocks. Cyclical sectors will do worse because interest rates are now likely to remain low for longer. And green technology stocks have been doing well lately because they have started to price in the promise of substantial green energy investments under Biden›. However, a Republican majority in the Senate could stop Biden’s green plans.
Jupiter
The outcome of the US elections is still uncertain, but the ‹Biden reflation trade› increasingly priced in by markets is already fading as investors reassess the risks, Jupiter Asset Management says in a written analysis.
The markets assumed a resounding victory for Biden. ‘Many investors had therefore gone long commodities, short dollars and short Treasuries in the hope that greater government support under a Democratic President and Congress would boost growth and reflation.’
Once again, however, it seems that the polls were wrong and the markets were ahead of the curve. ‘A very substantial victory for Biden is now out of the question. Trump’s aggressive campaign seems to have been underestimated. If neither side wins decisively, with a divided government and a small majority, it will be more difficult to push through stimulus measures effectively.’
At this point, a marginal victory for Biden seems to be the worst result for risky assets, as it is likely to slow down the push -hrough of the stimulus measures, in addition to higher taxes on companies and wealthy individuals.
In the face of this uncertainty, the US dollar has strengthened and US Treasuries have risen. Markets have again fled to the high growth potential of the technology sector, which is raising equity indices.
Jupiter expects volatility to increase in the coming weeks. In that climate, the dollar and Treasuries will gain ground as demand for safe-haven investments increases.
As there is a neck-and-neck race, there is also a growing risk that the result will be challenged. This will undoubtedly contribute to market volatility. A marginal victory by either party could lead to further social unrest, Jupiter believes.
UBS AM
If Trump wins the elections, it will result in an outperformance of US equities and a strong dollar, while for global equities risks of a tariff war will increase, says UBS AM.
‘If Trump challenges the election result, it could affect the global economic outlook and equities could perform poorly. At the same time, it will lead to dislocation, and that will give stock pickers opportunities again.’
If Biden wins, it will be positive for the markets in general. There will be a more predictable foreign and trade policy, which will reduce concerns about protectionism to some extent. In that case, a rise in the dollar, which has been seen in recent days, is not justified. On the contrary, in the event of a victory for Biden, UBS AM expects a fall in the greenback versus emerging market currencies.
This status quo should continue to support the valuation of high-visibility growth stocks and limit risks on fixed-income markets.