US Election result on a knife edge – is this the worst outcome for markets?

US debt

Randeep Somel, Equities Fund Manager, M&G Investments comments:

“A second-term for President Donald Trump is looking like a possibility in what has so far been a poor showing for the pollsters, who had Joe Biden up strongly in key swing states coming into the Election. Trump has significantly outperformed expectations, managing to hold Florida and Texas and looking increasingly confident of victory in key battlegrounds. So far, Trump’s confidence of victory is being reflected in the markets, with value stocks such as oil up in futures trading and a rally in the dollar likely if Trump holds out. This could change as absentee ballots are a big factor in this election which has not been the case in previous elections.

“What are the reasons for Donald Trump’s outperformance? It’s telling that according to a CNN poll last night, only 20% of the electorate felt that they were worse off now than they were 4 years ago. The US economy remains robust despite the Covid-19 pandemic, with a combination of bipartisan fiscal support and monetary stimulus helping to smooth over the worst of the economic volatility – for now.

“At this stage a continuation of the status quo is likely – a Trump Presidency, a Republican Senate and a Democrat House. However, absentee ballots could still favour the Democrats.  This will have implications for US fiscal expansion, which would be far larger in the case of a Democrat clean sweep, given the $2tn stimulus package that has been on the table. However, we still expect some form of fiscal stimulus irrespective of who wins the White House, as both parties put electoral manoeuvring to one side and focus on building back the US Economy.”

Fabiana Fedeli, Global Head of Fundamental Equities at Robeco comments: 

“At the time of writing, the race is tight and could go either way. This is true for both the Presidential election and for Congress. Until we have a clear win, and this may take until Friday, we should expect markets to be volatile and trade on election outcome news. A contested outcome would drag this volatility for as long as we have a clear result.

A President cum Congress would be a positive for markets whether it is Blue or Red. Markets don’t like uncertainty first and foremost and a President with the support of Congress would allow for more effective policy execution, including a support package. Either administration, supported by Congress would implement policies to support the economy.

From the point of view of equity markets a divided Congress at this point is the least desirable scenario, independently  from which side wins, as this could mean delays in policy execution and in what we believe is a much needed stimulus package in the near term.

There are two equity trades here: in the short term, until uncertainty on the outcome continues, we can expect investors to turn more defensive and some of those “Blue sweep” trades that we have seen arising since the summer and even more so over the last few days are likely to unravel: EM equities and FX, including China, the renewables theme (on expectation that a Biden administration would favor more environmentally friendly policies), and cyclicals over big tech. We are also likely to see some relief in “Red tide” trade, such as oil, or Russia which is a country that is expected to incur sanctions under a Biden administration. This however, could be a very short term trade and just in place until we have some clarity on the win.

In the end, which side wins will not determine equity market direction but rather sectors and – at an international level – country selection. What will really count are the type of policies implemented and the impact on the economy from the developments of a Covid-19 outbreak. One key point to watch is  the timing of a US stimulus package, as a delay would be negative for the US economy, consumption and cyclicals. Given the polarization in equities markets between cyclicals and growth stocks, and given the high expectations already embedded in the tech-savvy stocks that have driven the upside in equity markets, the next stage of market upside will have to come from the more cyclical stocks. These, however, need better visibility on an economic pickup.  Keep your eyes peeled on policies and Covid. That’s what really counts.”

Adrian Lowcock, head of personal investing at investment platform Willis Owen, comments:

“The election is much closer than many pundits expected, with Trump holding key battleground states including Texas, and a clear and quick result is looking less and less likely.

“It’s the worst outcome for markets, with futures jumping around as traders switch their trades to try and reflect the shifting sentiment towards the candidates, and we expect volatility to be high today. Investors may have to endure some vicious swings for the next few days if this drags on, and it has echoes of 2000 about it, when the result of George Bush Jnr versus Al Gore was too close to call.

That election was decided by just 537 votes in the end, following a lengthy court hearing which took three weeks to be concluded. Markets plunged in the interim, the S&P 500 falling 8.09% in less than a month. Global markets shared the pain, with the FTSE 100 down 4.9% during this period. This time is much different though. More details will emerge, but the challenges could be broader (not just focusing on one state). Therefore, prepare for some volatility over the coming weeks, but remember that investing is for the long term and the US courts will get a clear result in the end.”

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