US Elections: Trump vs Clinton, what will the impact on the markets be?

PUBLISHED: Fri, 04 Nov 2016 14:00:12 GMT
Impact on Markets
 The US represents around 25% of Global GDP, so what happens in its economy is very relevant to the global economy. The US represents an even bigger share of financial markets, with US-listed companies representing around 40% of the market cap of global listed equities and bonds issued by US government institutions and US corporations represent around 40% of the notional value of global bonds. The US dollar is also generally considered the world’s reserve currency, so the cliché that “if the US markets sneeze, the world markets catch a cold” very much holds true.

While the composition of the US Congress post-elections is likely to limit the direct impact on the US economy from legislative and fiscal changes, uncertainty around policy direction can limit activity and create a second-order drag on economic activity. Arguably the recent market weakness has already factored that into asset prices. Uncertainty can also increase volatility in security prices.

Although the implementation of each candidate’s policies is likely to be challenging, sentiment could impact asset prices, particularly in sectors that have been the focus of campaigning:

• Rates: While the president will have no control over monetary policy, fiscal policy can create a second order effect in rate markets. Trump is most likely to have an impact here, if elected, by creating a larger budget deficit through reduced taxation and increased government spending. The increased US deficit and increasing supply of US Treasuries issued to fund that additional deficit should both push bond yields higher. (Generally bad for bonds, emerging market [EM] currencies, high dividend yield stocks, real estate investment trusts [REITs] etc.)

• Financials: A Clinton victory would likely be bad for US banks as a result of increased regulation, this would also apply to so-called “shadow banks” – money market funds, insurance companies, hedge funds, private equity etc. who also engage in lending. Clinton also wants to introduce a tax for high-frequency trading. Changes to taxation for US individuals invested in private equity funds from the “carried interest” gains is something that’s being pushed by both candidates, but Clinton’s proposed tax hikes are much more punitive than Trump’s and would likely create fund-raising challenges for Private Equity managers.

• Healthcare: Clinton wants to increase the government’s spending on government healthcare (Obamacare) while Trump wants to do away with it. Health insurance providers who facilitate Obamacare have generally found it very unprofitable. High drug prices have got a lot of negative press from both campaigns, though mostly Clinton’s – legislation to address this is very unlikely, although negative media coverage could be an overhang for pharmaceutical companies under a Clinton administration.

• Fiscal spending: Both candidates want to increase fiscal spending – the focus of Clinton’s spending is predominantly healthcare and human services, while Trump is more likely to spend on infrastructure (which should benefit the construction, industrial and materials sectors), though it should be noted that the Republicans that control the House are generally opposed to increased government spending.

• Foreign policy: Trump is clearly the bigger risk to US foreign policy. He’s been very outspoken on Mexican immigration as well as on moving outsourced manufacturing jobs back to the US. Both candidates are keen to review trade agreements, with Trump determined to renegotiate most of them fairly aggressively. A Trump victory is likely to create a few jitters for the largest US trading partners (China, Mexico and Canada.

A Trump victory is likely to introduce more volatility into the markets, because it’s a marginally less likely outcome and there is more uncertainty around his policies. Arguably the lacklustre returns we have seen from the markets are already front-loading some of this – participants don’t want to be caught off-sides like they were with Brexit. This volatility should abate within a few weeks as the markets come to the realisation that the implementation of significant legislative and fiscal change is likely to be challenging given the make up of Congress (and Trump’s lack of support from some within his own party). The impact on the real economy should be limited, but uncertainty will likely weigh on markets for a few weeks and potentially longer in the areas mentioned above, where Trump has indicated a wish to make changes (Mexico,Canada, bonds) but that could create buying opportunities as we get more clarity on what will realistically change.

A Clinton victory should be more of a relief for markets, which could even rally on the news, though its unlikely to be significant and banks and pharmaceutical companies in particular could be pushed lower by negative sentiment and uncertainty.

Ultimately, the most likely outcome is increased volatility in financial markets (particularly with a Trump victory), but very little longer-term impact to the real economy.

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