This US election has certainly been unconventional to say the least and reflects the widely held view that American politics is becoming more polarized. On one side you have a seasoned politician, former First Lady, senator and secretary of state while on the other side you have a wealthy businessman and television personality. It has been an extraordinary election campaign consisting of outrageous statements and brutal insults - all of which have pushed the boundaries on what people once found acceptable. Neither candidate seems to be particularly popular and has had to defend themselves from seriously damaging allegations. Trump, for example, has faced accusations of sexual misconduct, meanwhile Clinton has been hit with a barrage of questions about the use of her private email address while secretary of state. The general consensus appears to be that Clinton isn’t trusted and is disliked by many, meanwhile Trump is perhaps one of the most controversial presidential candidates in living memory.
As Investment Managers, we try and stay impartial to such political events and, instead, prefer to consider the implications they may have on financial markets. Looking past all the mud-slinging, one of the unfortunate consequences of America’s presidential election turning into a quasi reality TV show is the absence of serious debate about either candidate’s overall economic policy. Both presidential candidates have proposed policies to boost growth, but the paths to get there are very different.
Should Clinton win, there is a widely held view that her economic policy will be a continuation of the current economic regime (although she will need to appease members of her own Party). Clinton is proposing higher taxes on the highest earners as well as new rates on capital gains while also hinting at raising Estate tax on the ultra-rich.
Conversely, many believe that a Trump presidency could be good for business; however Trump’s manifesto is short on detail so it is difficult to assess what his economic policy would look like. Trump has made tax cuts and a reduction in anti-global regulations a focal point of his agenda; however of particular concern is Trump’s rhetoric on immigration and protectionist international trade policies. A retreat of US foreign policy could harm global trade and signal a decline of the so called ‘Pax Americana’ era. A quick look at the US dollar / Mexican peso exchange rate and you will see there is a certain degree of correlation between a weakening of the peso and Trump’s rise to be the Republican Candidate.
In a rare example of bipartisan agreement, both candidates have tabled the need for more infrastructure spending. Such fiscal stimulus may be viewed as a positive by many investors who believe that Central Banks have reached the limitations of monetary policy.
Whoever wins the Presidency will need the support in Congress in order to enact any changes to the tax code or agree infrastructure spending; therefore it is important to consider the results of the congressional elections too. According to some of the polls one of the more probable outcomes of this election is that Clinton will be the next president, with a slim majority in the Senate but the Republicans will retain the majority in the House of Representatives. However, given the immensely divided political environment and the known flaws with the polls, trying to predict the outcome of this election with any degree of confidence is extremely difficult.
Political and event risks are always evident in markets and investors have faced numerous examples in recent times. In each case, these events have had a significant impact on investors’ mood in the short-term and the capacity to unsettle markets. However, whoever will be installed at 1600 Pennsylvania Avenue is likely to face resistance within the congressional houses and the possibility of gridlock. This is perhaps why a number of advisers believe that neither Clinton nor Trump will have a significant long-term impact on the financial markets or the global economy. However, that said, the election could result in much longer lasting ramifications for American political culture, particularly if we see greater disharmony between the main parties, more government shut downs and perhaps even an attempted impeachment over the coming years. It is this uncertainty that makes major asset allocation decisions, or positioning a portfolio based solely on a single anticipated outcome of a single event an extremely risky investment strategy. We will continue to urge clients to avoid the temptation of positioning portfolios in favour of a particular outcome as we simply feel that in the current environment this isn’t a risk worth taking. Couple together political risk and the wider macro environment and the arguments for a truly diversified portfolio become that much stronger.