How the US elections could impact equities

This article first appeared in Capital, The Edge Malaysia Weekly, on November 2, 2020 - November 08, 2020.
How the US elections could impact equities
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ON Nov 3, the world’s largest economy could have a new leader in Democratic Party nominee Joe Biden, or it could have four more years of policies under incumbent president and Republican Party nominee Donald Trump.

Or, in a worst-case scenario, history could repeat itself and there could be an election impasse. This last occurred during the 2000 election, touted as one of the closest presidential races in US history, between Republican George W Bush and Democrat Al Gore. Bush ended up winning the race after the US Supreme Court rejected Gore’s calls for a recount in the state of Florida.

Back then, the Dow Jones Industrial ­Average (DJIA) lost 231 points or 2.13% to close at 10,834.25 points on Nov 9, 2000, two days after the inconclusive election results. The FBM KLCI mirrored this fall by shedding 15 points or 2.03% to close at 752.44 points.

The election this time around is anticipated to be a close race as well, largely because the Trump administration has been widely criticised for its handling of the Covid-19 pandemic. The US has reported the most cases of Covid-19 in the world at over nine million, and more than 230,000 deaths due to the virus.

In fact, the rising number of cases, both in the US and globally, caused the DJIA to shed 943.24 points or 3.4% to finish at 26,519.95 points last Wednesday.

Axi chief global market strategist Stephen Innes is of the view that it is becoming increasingly difficult to separate the risks to the market posed by the pandemic and that of the US elections.

Nevertheless, he says that a “Biden Blue-Wave stimulus bounce” will be favourable to commodity-linked markets.

As widely reported in the international media, a “Blue Wave” or Democratic sweep in the election could unleash more fiscal stimulus than a “Red Wave” or Republican sweep.

“But his anti-fossil fuel stance should have oil and gas counters trembling in their boots,” Innes says of Biden. In contrast, a Trump win will be a boost to the O&G industry, he adds.

“This will be great for oil price takers in the world, including Malaysia. However, there are some concerns that Trump’s anti-China stance could hurt Asia.

“To me, that is more of a myth than a fact as China is internalising consumption via a wealth transfer from individuals to the corporations as the new policy regime encourages investors to buy China stocks. For [Southeast Asian] economies, the road still goes through Beijing, not Washington.

“Ultimately, a Biden win will be a short-term boost to risk sentiment before the reality check sets in regarding tax and regulation policies, while a Red Wave will generally see stocks perform better,” Innes tells The Edge.

In a Oct 20 strategy note, AmInvestment Bank head of equity research Malaysia Joshua Ng says there is still concern that the US and global markets may take a beating if Biden is elected as the 46th president of the US.

“Democrats are synonymous with high taxes and increased market regulations, which will curb investment, crimp profits and stifle innovation among US corporations, especially Big Tech, Big Pharma, Big Oil and banks.

“On the flip side of the coin, Democrats are in favour of fiscal expansion and they are advocates of free trade. These could be the potent policies to lift the US and global economies out of the pandemic doldrums,” he says.

However, Ng adds in his note that the market’s concerns over a potential election impasse are valid.

“Trump has not budged from his threat to challenge the legitimacy of postal ballots, and hence the outcome of the election, in the court. Two decades ago, the winner of the presidential race in the 2000 US election was only decided 36 days after the Nov 7 election day.

“The vote came down to Florida where Bush had won by such a slim margin that state law required a recount. The Florida Supreme Court ordered so but was subsequently blocked by the US Supreme Court on Dec 12, 2000. In the end, Bush was declared the winner for Florida’s electoral votes, and hence the presidency. While Gore’s legal advisers believed that he had not exhausted all legal options, Gore decided to put country before party and conceded on Dec 13, 2000.

“Amid the impasse, the DJIA lost as much as 5.2% at the lowest point (Dec 1, 2000). The FBM KLCI moved in tandem, tumbling about 5% during the same period,” says Ng.

He is of the view that in the upcoming election, an impasse that “could easily top the 36 days recorded during 2000” could occur if the outcome comes down to a court decision again.

“If that happens, we believe the potential damage to the stock market could exceed the 5.2% recorded then. We believe an inconclusive presidential vote in the 2020 US election may lead to prolonged political turmoil in the US. This could pose a significant downside risk to the global financial markets, including the FBM KLCI.

“On the flip side, a conclusive outcome is likely to unleash a relief rally globally, irrespective of who wins the presidency,” Ng states.

In an Oct 28 note, Schroders Investment Management says that many investors are expecting the big tech stocks that have powered the market rally this year to come under stricter regulatory scrutiny under a Democratic president.

“Meanwhile, banking stocks, which represent a large component of value indices, should profit from a stronger economy, especially if accompanied by higher interest rates. The issue is that banks are likely to face a tougher regulatory regime under the Democrats as well. It remains unclear whether one will outweigh the other, the firm says.

Schroders says, however, that in the long run, the impact should be neutral for equity investments, regardless of a Democratic or Republican win.

“Presidents do not operate inside a vacuum and there are many other factors that can influence markets such as valuations, interest rates and inflation. It is generally held that investors should avoid knee-jerk reactions once the winner is declared,” the firm says.

Possible outcomes of the elections, according to MBMG

Paul Gambles (pictured), managing director of Bangkok-based investment advisory firm MBMG Investment Advisory and a frequent commentator on CNBC and Bloomberg, shares his insights with The Edge on the possible outcomes of the Nov 3 US elections.

(For clarity, the Democratic Party now has the majority in the House of Representatives, also known as the lower house of the United States Congress, while the Republican Party has the majority in the Senate, which is the upper house of Congress.)

1.     Uncontested Biden victory, Democrats hold House of Representatives, GOP (Republican Party) holds Senate: Markets will respond fairly well as they will see this as stable in terms of tax implications. The stimulus fight will continue between the House of Representatives and Senate, Big Tech will be worried, not much will change but there will be some stasis and after any initial bounce, US equities will look ugly, while Treasuries will remain soft until next year.

2.     Uncontested Trump victory, Democrats hold House of Representatives, GOP holds Senate: Markets will respond fairly well as they will see this as stable in terms of tax implications. The stimulus fight will continue between the House of Representatives and Senate, Big Tech will be relieved, not much will change but there will be some stasis and after any initial bounce, US equities will look ugly, while Treasuries should start to strengthen immediately.

3.     Uncontested Biden victory, Democrats hold House of Representatives and gain Senate: Markets will respond badly as they will see this as negative in terms of tax implications. The stimulus fight will continue between the House of Representatives and Senate until January, Big Tech will be worried, and the lame duck session will quickly see US equities continuing to look ugly, while Treasuries will remain soft until next year. (In US politics, the period between the election in November and the inauguration of officials early the following year is commonly called the “lame duck period”.)

4.     Uncontested Trump victory, Democrats hold House of Representatives and gain Senate: Markets will respond badly as they will see this as negative in terms of tax implications. The stimulus fight will continue between the House of Representatives and Senate until January, Big Tech will be worried, and the lame duck session will quickly see US equities continuing to look ugly, while Treasuries will remain soft until next year.

5.     Contested outcome: Equities will fall sharply, bonds and gold should rise, the stimulus fight will continue between the House of Representatives and Senate, Big Tech will be worried, and after any resolution and bounce, the lame duck session will quickly see US equities continuing to look ugly again.

Gambles says that according to opinion polls, outcomes 1 or 3 is the likeliest to happen.

“The only outcomes where we’d expect the aftermath to be immediately positive for equities are 1 or 2 but then after that, it gets bad. It could be a long time until US equities get to move sustainably higher again.

“The buying opportunity for risk assets (like equities) is probably once we find the sweet spot between the stimulus, virus treatment prevention, the economic recovery and asset prices,” he says.

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