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The importance of the US election

Rebecca Cretney details how important the US election is to investors globally. She also explains how we have sought to mitigate the risks to clients’ portfolios posed by the election’s uncertainty.

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Published 4 November
5 mins

I overheard a conversation yesterday between two people chatting about the US election, one with an American accent. One person casually said to the other: “But whoever wins doesn’t have any impact on you, does it?”

The outcome of the US election has a bearing on everyone. There is a huge difference between Democrats and Republicans, and their foreign and domestic policies are of particular importance. These differences affect markets.

As such, it is worth flagging that the country’s foreign and domestic policy affects three major areas:

  • The trajectory of the US Dollar
  • Long-term government bond rates (which have a bearing on the bond prices of other economies)
  • The price of oil.

This, in turn, has a major impact on US and world markets. Both candidates have huge spending programmes. Biden’s spending is set to increase by US$11.1 trillion, which is partially offset by US$5.8 trillion in tax hikes and other savings. Trump plans to increase spending and tax cuts by US$5.45 trillion over the next decade, offset by US$0.75 trillion in savings.

Biden would, therefore, increase spending at twice the rate of Trump, with much of that spending expected to happen in the early part of his four-year term. Outright spending is more reflationary (i.e. supports an expansion in the level of output of an economy) than tax cuts because it gives money to consumers, who would spend the money, relative to producers, who tend to save it. The Biden plan would be more stimulating for overall activity even if the increase in debt is about the same. And while both candidates promise another stimulus package, and a Democratic one would be the more generous, both would have a positive impact on markets.

The biggest immediate risk to financial markets is not that which each candidate poses, but that the results of the election themselves could be contested. Trump has already ramped up the level of tension by declaring victory on election night and reiterating the allegations linking mail-in ballots to fraud. As we commented in our recent webinar, markets rely on the integrity of a country’s institutions (police force, judiciary, healthcare etc.). When these are called into question by the sitting president, it equates the world’s largest economy with issues usually seen in emerging markets. Where participants cannot rely on the stability of a country’s institutions, it is more difficult for the economy and markets to absorb adverse shocks.

But the biggest long-term issue is foreign policy, in particular trade wars with China and, possibly, Europe. The US/China commercial interaction has been the most important commercial relationship in history. The US has in many ways helped engineer China’s rise, which has been vital for the global economy.  In the webinar previously mentioned, we explained how the two greatest powers’ decoupling poses a risk to global growth. Although Biden will not go easy on China, he is more diplomatic. Under Trump, we may see phase two of the trade war with China.

Meanwhile, we may also see spats with the EU hitting the news headlines as perceptions of instability and competition between the two blocs spill into tit-for-tat tariffs. Although Trump was always unlikely to change his views on climate change and security – issues very close to European hearts – he could see his victory as an endorsement of those views. With the EU already teed up to impose US$4 billion in compensatory tariffs on US exports, in response to Washington subsidies to Boeing, tensions could escalate quickly. This would be bad for world trade, economies and equities.

How are our portfolios positioned?

It is worth noting that whatever happens in the US election, the market remains very polarised at the moment, with central bank policies having driven yields on cash and government bonds down towards zero. The outcome of the election is not going to change this. As countries continue to support their economies during this pandemic, debt levels will keep expanding and interest rates will remain low to enable debt maintenance.

It is also worth flagging that clients’ portfolios are not especially positioned for any particular result and, by the same token, we would not consider them especially vulnerable either. While the pollsters predicted a Biden victory in the presidential race, they may well be proven wrong once more. The Democrats do not seem to have been granted the powers of a “Blue Wave” (i.e. winning the presidency, the House of Representatives and the Senate). Meanwhile, one election result does not alter long-term economic trends – that takes decades.

We, of course, recognise that the outcome has the potential to amplify volatility across equity, bond and currency markets, particularly in the short term. Given that the current portfolio positioning is cautious, should the outcome lead to cheaper valuations (due to market declines), our focus would be to consider adding to riskier assets, particularly if we see the S&P 500 breach our target levels. One sector that is likely to come into the cross hairs in either victory is tech. From the attempts by social media companies to label Trump’s posts to the possible tax revenue that could be extracted from these companies, either administration could put paid to the outperformance that the FAANGs1 and their peers have enjoyed.

In other areas, it’s doubtful that government bond yields will move so much that we will want to add interest rate risk, although we will be watching the credit spreads as corporate and high yield bonds are also areas that may offer up some value.

In summary, our portfolios continue to have a cautious positioning. They are managed with a long-term outlook as opposed to trying to tap into speculative gain. Our global outlook and multi-asset class approach give us the ability to tap into the best opportunities in the world. While we are keenly aware of risks such as the US election, the trade wars or Brexit, having huge diversification continues to be the key to mitigating them.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how goals-based investing can help, or call +44 (0)1624 645000 to speak to our client services team.

 

If you would like to find out more about how we can help clients manage their investments, please contact us on the same number as above, or complete a form using the links towards the end of the page.

1 The FAANGs are Facebook, Amazon, Apple, Netflix and Google’s parent company Alphabet.

 

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rate changes also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

about the author

Rebecca Cretney

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. Rebecca was appointed to the role of investment counsellor in March 2019 to focus exclusively on the company’s discretionary investment management services.

 

She works closely with our teams of private bankers to provide support in advising our clients with integrity, and to give additional technical investment expertise where more complex portfolio requirements exist.

 

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

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