Anthony Gillham, co-investment director, multi asset at Old Mutual Global Investors, discusses the implications for markets and macroeconomics of the forthcoming US presidential election.
First a win by Hillary Clinton, pictured left, the Democratic candidate; secondly a win by Donald Trump, pictured above, her Republican rival.
Q: WHAT IMPACT MIGHT THE ELECTION HAVE ON US COMPANY SHARES?
A: Trump’s plans for cuts to corporate and personal tax rates may boost company earnings and consumer spending. Like Clinton, he has pledged to boost spending on infrastructure, which could lift economic growth and support US companies linked to rail and road projects.
But Trump’s protectionist agenda might harm global industries whose revenues are derived from international trade, such as transportation companies.
Protectionism – involving the imposition of tariffs on foreign goods and services – might also stoke inflation by raising consumer prices, while large federal spending programs would involve the government borrowing more than it earns, adding to an already substantial national debt. Against this backdrop, US government bond markets would likely weaken, with prices declining and yields rising. Conversely, this could support financial companies – especially banks, whose lending rates are linked to government bond yields.
Clinton, for her part, prefers to raise taxes on the wealthy to finance increased government spending, some of which would also be on infrastructure. The Democratic candidate seeks to raise the federal minimum wage, which might lower company profit margins but also boost US consumption, by giving people more money in their pocket – and in turn, lifting company revenues.
And while the Democratic candidate has recently sounded less supportive of international trade than earlier on in her career, she remains broadly in favour of legislation that boosts commerce between nations.
Long term investment approach
Regardless of the outcome, it is widely accepted that taking a long-term approach to investment can ultimately be more beneficial than trying to ‘time markets’ by increasing or decreasing one’s exposure in the short-term, based on expectations for the outcomes of binary events like elections. Such action risks leaving investors out of the market when company shares advance – or bounce back after markets declines; indeed, some of the strongest rallies in stock markets are on the days following declines. Missing out on these bounce-backs can materially damage investment returns over the long run.
Q: WHAT IMPACT MIGHT THE ELECTION HAVE ON THE US DOLLAR?
A: A Trump win might boost the US dollar against the currencies of countries that are sensitive to tensions in trade with the US – in particular, Mexico, on whose border the Republican candidate has vowed to build a wall. Other currencies that are perceived to be ‘safe havens’ in times of investor uncertainty, like the Japanese yen, could strengthen against the US dollar.
The impact of a Clinton victory could be less marked in currency markets, given the former first lady and secretary of state’s far less critical stance on world trade.
Q: WHAT IMPACT MIGHT THE ELECTION HAVE ON THE WORLD ECONOMY?
A: Trump’s tax and spending proposals could stimulate US and global economic growth in the short-to-medium term, albeit at the same time as increasing the level of government spending relative to the amount of money it receives in taxes. The reality TV star’s anti-trade position could harm other economies, especially those of emerging markets like Mexico, and stoke domestic inflation by raising the price of imported goods and services.
Even though Clinton has backed away from some of the trade policies of the Obama administration, the Democratic candidate still appears to agree with their underlying logic, indicating that the level of commerce between countries might remain roughly the same. More broadly, as Trump’s platform would constitute a clear break from the policies pursued by outgoing US President Barack Obama, uncertainty among business leaders and investors would probably grow, hurting investment.
That said, despite the vast differences between the candidates’ proposals, there is a strong chance that power in the US legislature, Congress, will remain split between their two parties. This raises the risk that legislators will continue to obstruct presidential initiatives, making meaningful shifts in policy under either Clinton or Trump less likely.
It is also worth noting that the world is currently registering solid, if not strong, growth – driven largely by the US and China. This suggests the global economy may remain on track, regardless of whichever candidate takes office.
* Please remember that past performance is not a guide to future performance. The value of investments and the income from them can go down as well as up and investors may not get back any of the amount originally invested. Exchange rates may cause the value of overseas investments to rise or fall.