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US Elections - What Wealth Managers Expect, Fear And Hope For

Tom Burroughes, Group Editor , 7 November 2016

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A collection of wealth managers give their views on the US elections, touching on issues ranging from demographics to gold prices and the US equity market.

On the eve of the US election, here is a collection of views from wealth and investment firms about the likely scenarios in the markets and the economy depending on whether there is a victory for Hillary Clinton or Donald Trump. Regardless of whether readers are in mainland China, Singapore, Dubai, Zurich or London, they will need to pay heed to the outcome and the potential impact of a new administration. With that in mind, here are views from firms from a number of locations.

David Absolon, investment director, Heartwood Investment Management
If we think about the last twenty five years, various US presidents have been defined by a specific policy agenda. For Bill Clinton it was “The Economy Stupid” - an era of free trade and globalisation; for George Bush it was the “War on Terror”; and for Barack Obama it has been the Affordable Care Act.

For the next US president, outside of the realm of foreign policy, he or she will likely be measured by how effectively US economic growth can be restored to levels that help reduce inequalities and raise the standard of living for "middle" America. Large swathes of the US electorate are looking for the restoration of the "American dream", an ideal that has appeared elusive to many over the last 10 to 15 years.

Of the two current candidates, Donald Trump presents an unpredictable prospect and he could bring significant change. In the short term financial markets will probably react negatively, but over the longer term a Trump presidency could be a boon to US assets if his fiscal stimulus plans, which are meaningful, turn out to be a positive game changer for the US economy.

On the other hand, Hillary Clinton is the establishment figure and with that association she brings stability. US markets are likely to respond favourably to her election in the short term. If Clinton is able to convince a sceptical electorate that globalisation is a force for good, then this should have a lasting impact on the health of the global economy and financial markets. However, the path will be bumpy as Clinton will probably be reliant on a Republican controlled Congress, at least in the lower house.

Whoever becomes the 45th president of the United States, expectations are high that he or she will signal a new era of economic policy and reform. Tackling low productivity growth, low wages and rising income inequalities are issues not just exclusive to the US, but also apply to many other developed economies. This is not just an election for the US, but one pivotal to the future shape of the global economy.

Carol Schleif, deputy chief investment officer of Abbot Downing 
She was asked the broad question as to what is going right for the US at the moment and here are her thoughts:

Demographics - Millennials are diverse, well educated, and are now the largest segment of the US population – both as age contingent and as percentage of workers. Contrary to popular opinion, they are emotionally engaged in the country and in life in general; employed; building households, having kids; they are savers living within (or more typically on less than) their means; and they are rapidly paying down debt. They are into social networks, sharing – ideas, resources, and best practices.  

Innovation - Innovation continues unabated. According to the US Patent & Trademark Office, 325,979 patents were issued in 2015. This compares to 176,083 in 2000 (the peak of the first internet boom). Innovating in genomics; personalised medicine; service models; drones; driverless cars; manufacturing techniques; materials; 3D printing; cyber security, etc. And the pace in many fields seems to be picking up exponentially. Innovation zones are sprouting up all around the country.    

Engagement - whether or not you agreed with anything a single politician said, more folks seem to be engaged in more important debates. As reported by NPR, there are nearly 71 voter initiated ballot measures on state ballots next week. The public is taking matters into its own hands if it can not get government to work together to do it. That engagement, leaning into versus away from the process, is a long-term benefit to all.  

Globalisation will continue - As the global pie grows, we all benefit. While one scenario of victor in next Tuesday’s elections would throw up trade barriers - and there would undoubtedly be retaliation - resources intellectual, human, physical, resources will inevitably seek the locale with the least friction and most hospitable environments.

Mark McFarland, chief economist Asia at Union Bancaire Privée
He addresses the case for holding gold in such uncertain times. 

Gold has broken above $1,300 again. This enhances its appeal as a way of offsetting the risk of potentially more volatile markets in November and December. Normally, a rise in yields on long-term US government bonds would push gold prices lower, as it has limited yield or intrinsic value. It is rising for two reasons: one, increased uncertainty over the US election, and two, the rise in inflation due to more stable oil prices. 

Who will win the US election next week? We do not know, despite there being a clear preference for one candidate over the other in polls since September. There is simply too much volatility in the news flow as well as accusations. Memories of how polls got the UK Brexit referendum badly wrong are still fresh. Gold is also important because inflation in the US is back above 2 per cent. Long-term bond yields may have risen to 1.8 per cent but the level of inflation that is expected in five years has gone from 1.9 per cent to almost 2.3 per cent. After adjusting for inflation, 10-year US government bonds yield -0.5 per cent and gold yields zero. (Source: Bloomberg). That is why gold prices have been going up since mid-October - political uncertainty and inflation risk.

Gold is appealing because it can reduce the risk of loss by it being less correlated with other assets in a portfolio. Bonds and equities may fall, but the overall value of your assets will fall by less if gold is in there too. As we head towards Donald Trump v Hillary Clinton and the December meeting of the US Federal Reserve, having a bit of yellow metal in your portfolio may not be a bad thing.

Edmond de Rothschild
US elections cause short-term volatility but rarely represent a turning point for Wall Street and global markets. In recent decades, markets performed relatively well after elections. However, this year’s race for the White House is unlike previous episodes. To secure the coveted position of president, both candidates have been mercilessly fighting it out for several months, with no holds barred.  

Various scenarios with very different effects are taking shape. In the case of a Hillary Clinton victory most investors expect to see a divided Congress with the Democrats taking control of the Senate and Republicans holding on to the House of Representatives. As a result, the winner may not have an entirely free hand, especially over issues relating to tax, healthcare and budgetary spending. Were this to happen, the biggest political event of the season would have little impact on markets as it would mean no fundamental change in policy compared to the Obama administration.  

Markets would probably applaud such a scenario as it would be beneficial for compromises. Over the short term, it will drive higher US Treasury yields and strengthen the US dollar. Over the medium term, an increase in government spending could underpin US growth and inflation. A “Democratic sweep”, i.e. a scenario in which the party took control of both houses, would surprise and almost certainly worry investors. That would mean Congress leaving Hillary Clinton free to carry out structural change and introduce a number of reforms that would hit certain sectors.

Donald Trump’s victory would facilitate the implementation of his proposals if Congress were to remain under Republican control. Such an outcome could trigger market volatility as his economic plan is steeped in protectionism. Also, a Trump win could send US Treasury yields sharply lower over the short term and darken the outlook for emerging country economic markets and earnings.

Dolfin (a UK-based firm)

It set out some options for investors covering a variety of possible scenarios.

Buy financials: Despite the anti-Wall Street rhetoric from both candidates (especially Clinton) implying that they will increase the sector’s regulatory burden and close loopholes, a steepening US yield curve supported by rising interest rates and benign inflation environment will provide an environment in which banks and financials in general will likely outperform.

Buy infrastructure, basic materials (non-precious metals) and engineering stocks: The fiscal spending commitment and the need for infrastructure projects set the stage for stock appreciation in the various sub-sectors. The infrastructure play appeals to voters and investors from both political parties.

Buy treasury inflation protected securities: Expansionary fiscal policy will be more effective in bringing inflation higher. Exposure to linkers gives investors a better alternative than gold (correlation above 50 per cent), since they can ride an asset class with positive carry.

Buy US dollar: Both candidates will support and strengthen corporate America, providing room for the interest rates to rise further acting as tailwind for the dollar.

Sell US Treasuries: Again, fiscal policy and rising rates should be the reference point. Also, long term sustainability at current long-term yields is definitely questionable for insurance companies, pension funds and endowments.
 

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