Will the US presidential election 2016 be a non-event for the markets?

Asset Management - 04.11.2016

The 45th US President will soon be elected, ending a period of uncomfortable suspense for investors. The spotlight on November 8 will also be on Congressional elections for the US Senate and House of Representatives, two assemblies that Hillary Clinton and Donald Trump will have to deal with to get reform measures approved. The result of this tough Presidential race with many twists is unlikely to make a big difference to financial markets but it could favour some sectors. (English version)



Benjamin Melman
Benjamin Melman
Head of Asset Allocation & Sovereign Debt
 
Christophe Foliot
Christophe Foliot
Head of International Equities

The threat of a Brexit rerun is receding

US elections cause short term volatility but rarely represent a turning point for Wall Street and global markets. In recent decades, markets have tended to perform relatively well after elections. However, this year’s race for the White House is unlike previous episodes. To secure the coveted position of President, both candidates have been mercilessly fighting it out for several months, with no holds barred.

Various scenarios with very different effects are taking shape. In the case of a Hillary Clinton victory, most investors expect to see a divided Congress with the Democrats taking control of the Senate and Republicans holding on to the House of Representatives. As a result, the winner may not have an entirely free hand, especially over issues relating to tax, healthcare and budgetary spending. Were this to happen, the biggest political event of the season would have little impact on markets as it would mean no fundamental change in policy compared to the Obama administration.

Markets would probably applaud such a scenario as it would be good for compromises. Over the short term, it should send both US Treasury yields and the US dollar higher. And over the medium term, an increase in government spending could underpin US growth and inflation. A “Democratic sweep”, i.e. a scenario in which the party took control of both houses, would surprise and almost certainly inconvenience investors. That would mean Congress leaving Hillary Clinton free to carry out structural change and introduce a number of reforms that would hit certain sectors.

Donald Trump‘s victory would facilitate the implementation of his proposals if Congress were to remain under Republican control. Such an outcome could trigger market volatility as Trump’s economic programme is steeped in protectionism. And having Donald Trump in the White House could send US Treasury yields sharply lower over the short term. At the same time, the outlook for emerging country economies and earnings would also suffer.

Winners and losers

Market trajectories will depend on the ability of the winner to roll out his or her programme. A Clinton victory, with a divided Congress, should limit market volatility as investors will be relieved to see the administration having to adopt a culture of conciliation and half measures. As a result, the financial sector could avoid any further increase in regulatory burdens. The pressure would also be taken off healthcare companies which could then perform well given the sector’s upbeat earnings prospects.

In the absence of a Democratic sweep, several of Hillary Clinton’s headline proposals for healthcare, such as capping drug price increases and making transparency on development costs mandatory, would probably be watered down. Elsewhere, in the wake of a general increase in wages, we can expect to see margins crimped in the restaurant and IT sectors.

But should Donald Trump win, sectors with strong exposure to the domestic US market, such as defence and infrastructure, will almost certainly benefit. A Trump victory would also lift energy stocks as he is keen to ease anti-global warming regulations.

There are also marked divergences between each candidate’s monetary policy agendas. Hillary Clinton is a supporter of Janet Yellen while Donald Trump has criticised the Fed chair’s approach and methods. If he wins, he could argue in favour of replacing her in 2018. But before that happens, and once the election fever and short term disruption has evaporated, Janet Yellen could play her hand. 

November 2016. This document is non-binding and its content is exclusively for information purpose.

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