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Investors Haven't Fully Priced In US Election Stalemate - Pictet

Tom Burroughes, Group Editor , London, 23 October 2020

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The Swiss private bank has sought to weigh the risks of different US election results, and reckons that the chance of a contested result has not been fully discounted by investors.

Investors appear not to have fully priced in the risk that there may be a protracted legal standoff between the Republicans and Democrats if the 3 November Presidential elections fail to yield a clear result, according to Pictet Wealth Management.

While polls have given Democrat candidate Joe Biden the lead for weeks, those familiar with polling predictions going wrong may still be positioned for President Donald Trump remaining in the White House. As it is, the market has not “significantly” priced the chance of the kind of row that erupted after the wafer-thin result of the 2000 poll between Al Gore and George W Bush, the Swiss bank said.

It may make sense to use foreign exchange trades to hedge some exposures caused by the chances of an impasse, César Pérez Ruiz, head of investments and chief investment officer, Pictet Wealth Management, told journalists in a briefing.

The Geneva-based firm is underweight equities overall, including US, eurozone, Swiss and global emerging market stocks; neutral on the UK and Japan and Asian emerging markets. It is also underweight fixed income, and has overweight positions for alternative assets, such as private equity, gold, the Swiss franc versus gold and the Japanese yen against the dollar.

Economists noted how, in November 2000, the failure to obtain a decisive result sent a number of equity and other markets down sharply.

Scenarios
Pictet sets out four potential outcomes, each with different implications for investors:

Trump wins, and Republicans control Congress; Trump wins, but there is a divided Congress; Biden wins, with divided Congress, and Biden wins, and Democrats control Congress. Under the Trump wins/Republican Congress outcome (5 per cent chance), this will mean loose monetary policy and tax cuts as positive outcomes, and Senate vs House legislative tensions as negatives. The outcome will be positive for the dollar, and 10-year US Treasury yields will rise. 

If there is a Trump win/divided Congress – producing a “lame duck” presidency (25 per cent chance), there will be continuity, loose Fed policy, but also tensions with China and frictions about immigration. This will also be positive for the dollar and bond yields. 

Pictet is giving a 40 per cent chance of a third scenario: Biden winning, but with a divided Congress. This will lead to “smooth” trade relationships, but also some inertia in Congress. This will weaken the dollar and push down bond yields. As for a Biden win/Democrat Congress result (30 per cent chance), that will produce more Green spending and a fiscal stimulus, but also higher taxes and “dogmatic” foreign policy. The dollar will weaken and bond yields will rise.

Guessing the future
Elsewhere, Pictet’s economists tried to guess what the political map will mean for areas such as “Green” spending, US relations with China and Europe, and the direction of monetary policy.

Thomas Costerg, senior economist, Pictet Wealth Management, said that rising unemployment, as has been the case since the outbreak of COVID-19 in the US, has usually coincided with political damage, as in the cases of Jimmy Carter in 1980 and George HW Bush in 1992.

He noted that across a wide part of the political spectrum, there appears to be a more relaxed view about high public debt and deficits, suggesting that the doctrine branded Modern Monetary Theory may gain acceptance. MMT claims that government can spend more freely by borrowing or printing money than is assumed by conventional monetary theory. MMT advocates say governments can pay for goods, services, and financial assets without a need to collect money in tax or debt issuance in advance of such purchases. They also claim that governments cannot be forced to default on debt denominated in its own currency. Critics say these views are naïve, and previous attempts to print money to pay off heavy debts inevitably produce inflation eventually.

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