This presidential campaign has been nothing if not unpredictable.
Less than a fortnight ago, a victory for Hillary Clinton looked all but certain. Then it emerged that the FBI was investigating a new set of emails connected with her private server. Now, she has been cleared, but Donald Trump is arguing that her latest exoneration is just another example of a system rigged in her favour.
What either candidate would or, more importantly, could do when they reach the Oval Office is perhaps even less clear, so working out which asset classes are likely to benefit from either outcome is a difficult task.
America’s famous checks and balances will ensure that either candidate will have limited influence over many areas of domestic policy – including any wall-building or ramping up of infrastructure spending – without congressional consent.
A Democrat clean sweep of the White House, the Senate and the House of Representatives looks less likely than it did just a few weeks ago, so political gridlock looks probable in any event. This would temper the impact that either candidate would have on bonds, equities and FX in the US and abroad.
So what do investors need to know?
Why markets fear Trump
Before the weekend, Trump’s odds were improving. Gold bullion sentiment reached a multi-year high, and the S&P 500 last week posted its longest run of daily declines since the financial crisis. Investors poured out of high yield bonds, corporate credit and US equities, and into Treasuries, cash and gold.
As much as $200 an ounce could be added to the gold price if Trump wins, HSBC chief precious metals analyst James Steel told Bloomberg in an interview. He also said that gold could jump by at least 8 per cent whoever wins, given both candidates’ commitment to trade (or lack of it). Of the two, however, Trump is undoubtedly the most hostile, and the long-term impact for global markets could be deleterious.
If he wins, the dollar would probably fall in the short term, as the Fed may be forced to delay its anticipated rate hike in December to keep the US economy competitive. The Swiss franc and Japanese yen would strengthen as global investors opt for safe haven currencies, while emerging market fiats like the liquid Mexican peso, which has acted as a barometer for Trump’s electoral fortunes, would be pummelled.
“A weaker dollar would be a boon to the multinationals that dominate the S&P 500 and could offset concerns about a protectionist backlash stemming from Trump’s proposals on trade,” wrote John Higgins of Capital Economics. The dollar could later strengthen if Trump slashes taxes and increases spending.
Of course, if Trump disrupts the Fed by choosing a leadership which would be more sympathetic to tightening policy, more rate hikes could be around the corner. But if inflation rises precipitously, the Fed might be forced to raise rates anyway, which would push up the yield on US Treasuries.
Trump has pledged to take the US out of Nafta, damaging trade with Mexico, and label China a currency manipulator. These measures would allow him to hike tariffs on imports from both countries. He would need congressional consent to deliver on his threat to leave the World Trade Organisation, but experts say that he has the authority to spark a trade war all on his own.
If jobs are lost in China as a result of dented demand, social stability could be threatened, suggested Gary Greenberg, head of emerging markets at Hermes Investment Management. “In response, the [Chinese] authorities could then impose capital controls, change the composition of its foreign-exchange reserves to include fewer US Treasuries, and restrict access for US firms.
American import prices could rocket, causing inflation and a housing market relapse.” US equities might be hit as a result, though they might equally be seen as a preferable alternative if Treasuries were to sell off over fears of reduced tax revenues and higher public spending.
Clinton would not end Nafta which Bill Clinton ushered in, but she is cold on the idea of signing new trade deals, which would hurt export-reliant US company stocks.
Having led the bull market for five years, healthcare companies in the S&P 500 have been some of the biggest losers so far this year, falling more than 3 per cent in a week in October, before the FBI announced they were investigating Clinton’s emails. Turing, Mylan and Valeant have faced congressional hearings, and the Democrat says she would impose penalties on drugmakers for hiking prices on long-available and generic treatments.
“In the absence of a Democratic sweep, several of Hillary Clinton’s headline proposals for healthcare, such as capping drug price increases and making transparency on development costs mandatory, would probably be watered down,” wrote Christophe Foliot, head of international equities at Edmond de Rothschild Asset Management on Friday. “Elsewhere, in the wake of a general increase in wages, we would expect to see margins crimped in the restaurant and IT sectors.” Banks could also face greater regulation.
Read more: AT&T draws eye of Clinton with media merger
There are sectors which could benefit under each candidate. Both would spend freely on defence and infrastructure, for example, provided that Congress doesn’t block it. David Kostin of Goldman Sachs has recommended buying shares with large exposure to US government revenue.
On energy, Trump could mean cheaper oil, benefiting consumers in countries which import the black stuff, such as India and much of Europe. “[Trump] would likely focus on maximising domestic oil and gas production by abolishing the regulations increasing drilling costs, and accelerating exploration on federal lands and offshore areas – prohibited under Obama,” said Greenberg.
The budget deficits of Mexico, Russia and the Middle East would widen as a result, driving up yields on government debt. It could be quite different under Clinton, who has a negative outlook on America's shale revolution, and under whom renewables would probably do well.