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

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.