The impact of the US election on the world economy
In the lead-up to the US presidential elections, candidates strategically hold back big, campaign-altering news until the month before Americans go to the polls in the hope of pushing themselves over the electoral line. The the big surprise came last week when the president announced in the early hours of October 2 that he and his wife had tested positive for Covid-19. Markets immediately dipped on the news.
Though they later rallied, Donald Trump’s diagnosis raised volatility levels and unsettled investors. The disturbance focuses attention on an even bigger event for markets — the election itself. What are the likely scenarios and how can investors around the world, including those in the UK, mitigate the risks? British investors are exposed because they are active in international markets, with their foreign holdings concentrated in the US. At Interactive Investor, one of the UK’s largest DIY investment platforms, customers have some 20 per cent of their equities invested overseas, of which, on average, 77 per cent is US shares.
A Democrat majority in both houses, combined with a Biden victory, could pave the way for increased regulation on business and higher taxes. All of that has been traditionally bad news for shares, just as Mr Trump’s early tax cuts boosted US equities. However, divided party control could spell gridlock and uncertainty over stimulus packages, which tend to boost markets.
Investors appear increasingly concerned by tensions between Mr Trump and the Democrats over a new fiscal stimulus package. Signs of progress on passing a package early in the week prompted fund managers to begin pricing in a “much-needed boost to economic prospects”, according to Richard Hunter, head of markets at Interactive Investor. But equity markets fell after Mr Trump abruptly announced he would walk away from negotiations with Democrats.
With some key state polls tight and this positive test coming so close to the election, this development will just add to the uncertainty rippling through the markets, investment analyst at Hargreaves Lansdown, the UK’s largest investment platform.
The fall in the US stock market could also suggest investors think a Biden win is more likely than ever. Mr Biden’s intention to raise taxes will not be good for corporate profits and therefore a negative for the stock market.
The scenario of economic instability is looking very carefully at the possible winner of the US elections. A Trump victory combined with a divided Congress — the status quo maintained — would lead to little change in the markets, analysts say. Having cut corporate taxes from 35 per cent to 21 per cent, more fiscal action could be in the pipeline, though Mr Trump’s economic latitude to introduce further Covid-related stimulus measures is constrained. But economic optimism is scarce on the ground. While growth shares such as the five largest tech stocks in the US — Facebook, Apple, Amazon, Netflix and Google, collectively known as the Faangs — have continued to outperform the markets, most other stocks are flagging, suggesting investors do not see a broad recovery in the short term. A Trump victory almost certainly means more trade friction and escalated commercial conflict with China, analysts say. All this will put pressure on the dollar, a key consideration for non-US buyers of American stocks.
A Democratic victory would be supportive for risk assets but would also entail a larger deficit outlook and an increased risk of inflation, which implies lower real rate. Any switch in administration tends to be followed by a period of underperformance in the markets, says David Bailin, chief investment officer at Citi Wealth Management, a part of Citigroup. Yet, historically, markets have done better under Democrats, he adds. Democrats have tended to take over in times of problems needing to get resolved. Investors should be invested for the expected recoveries in 2021 and 2022, regardless of the US election, and would be wise not to sell in the current market but to consider strategic reallocations. He favours a shift away from being overweight in tech, media and telecoms — into more cyclical industries.
By Domenico Greco
