Nikko AM: US election conclusion is far from assured

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“So far, it seems the odds are favouring our prediction since June that Biden would win the Presidency but the Republicans would control the Senate. The conclusion however, is far from assured and will likely take two months to confirm. In the meantime, both equity and bond markets are revelling in our scenario of a toned-down Democratic stimulus plan, but there is a significant chance that roadblocks to such will occur. Although Biden, even without control of Congress, would have the ability to cancel all of Trump’s executive orders, his ability to issue his own orders may be blocked by regional judges. Even certain regulatory changes may be blocked in the same way that Trump’s were often blocked. One thing seems nearly certain, the media business will continue to thrive as all of this uncertainty proceeds and that the US will likely become an even more divided country.

“Many businesses can thrive in such a stalemated situation as long as there is continued fiscal and monetary stimulus, but no major civil unrest. In that regard, US 3Q earnings have been extremely good as costs continued to be pared and pricing power seemed very strong in many industries. Advertising costs and product discounting seemed particularly cut in many industries. Tech hardware and software demand surged particularly impressively, although some of that for components was pre-sanction demand from a major Chinese manufacturer. Auto companies reported much better profits than expected due to demand for high priced models and curtailed costs. So far in the 4Q, there seems little reason to expect earnings to disappoint, and in the end, corporate profits and their future outlook are the main determinants of equity performance. One area of concern is the lack of market attention to the fact that many recent mega-mergers, particularly in the tech sector, may be blocked on anti-competitive grounds.

“Japanese equities should not deviate too strongly from the US trend, as both Presidential candidates wished to maintain stable relations, and global economic trends are now highly favouring Japanese companies.”

John Vail is Chief Global Strategist at Nikko AM

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