USOct 23 2020

Markets to bear the brunt of any Trump election resistance

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Markets to bear the brunt of any Trump election resistance

A close-call election disputed by US President Donald Trump would be the “worst case scenario” for investors when US voters head to the polls next month.

Investment analysts have warned markets could face disruption if Mr Trump – who has previously raised issues over the election being “rigged” and has not said on record that he would leave the White House even if he loses the vote – does not accept the result.

Randeep Somel, associate fund manager at M&G Investments, said: “A disputed election is the worst-case scenario.

“The US constitution allows for such an eventuality, which is why there is a 10-week lag between the time of the election and the inauguration. But it would undoubtedly inject uncertainty into markets until there is a legitimate and official winner.”

Darius McDermott, managing director at Fund Calibre, agreed, saying that Mr Trump was “likely to contest the result” if Joe Biden won by a small margin, which would be “highly disruptive to markets” as there would be uncertainty until the end of January.

For Tom Boyle, market strategist at Atlantic House Investments, Mr Trump disputing the election in any other scenario than a landslide win for himself was the “base case”.

He said: “Mr Trump landed a huge electoral college win in 2016, and he contested that, so we do not see that as being any different in 2020.”

It would not be the first time a disputed election disrupted US markets.

In 2000, a recount in the George Bush versus Al Gore election left the outcome in limbo for weeks and the S&P 500 fell 8 per cent over one month.

Mr Somel added: “With the increase in ‘mail-in’ votes this year, which will take time to count, a repeat of the 2000 election is possible.

“If there are any indications of voter fraud, either candidate could refuse to accept the result.”

Scott Gallacher, of Rowley Turton, agreed, raising concerns Mr Trump would be more like a “wounded tiger” than a “lame duck” president in the interim period between the election and the inauguration.

He added: “Either way, that intervening period in any Trump loss is likely to cause concern for investors.”

Stopped in its tracks

Any shock to US markets would be a U-turn on what has been a remarkable rally for North American equities, with the S&P 500 up nearly 70 per cent over the past five years.

Its growth has primarily been driven by the ongoing success story of US tech stocks, their rising share prices buoyed by the coronavirus-induced lockdown that hamstrung other companies.

The S&P 500 is up 55 per cent since the March lows, when the pandemic caused global markets to tumble, and is up nearly 7 per cent since the start of the year.

And its seemingly unstoppable rally has been met with equally strong demand. Investment Association data shows investors piled £4.2bn into Global funds (heavily exposed to US stocks) from April to August this year and £1bn into the funds in the North American sector.

By comparison, millions of pounds were pulled from the UK All Companies sector over the same time period.

Biden bags blue backlash

Although typically seen as a negative for tax, corporations and the national debt, experts were not fretful about the effect of a ‘blue wave’ with Mr Biden at the helm.

Promises of a comprehensive fiscal package and a focus on climate change appear to have balanced tax fears, while the economic impact of the coronavirus crisis may hamstring a Biden presidency’s ability to regulate US technology companies.

Mr McDemott said: “If Mr Biden wins by a landslide, markets may dip initially as he would have much freer rein to get change through.

“But who is to say that regulation of big tech or rising taxes would be his top priorities? Restarting the economy will likely be a higher consideration and I doubt he’ll want to do anything to hinder the recovery.”

For Mr Somel, it helped that Mr Biden was a “known entity”.

He said: “[Mr Biden] has been in politics for 47 years and has a reputation for bi-partisan pragmatism.

“The next president will also decide the direction of travel for the world’s largest economy when it comes to environmental policy.

"For investors focused on the environment and sustainability, a Biden presidency will be very positive for sentiment.”

For investors in international equities, a Biden victory could also signal a loosening of trade tensions as he is likely to take a softer approach on the US Sino-trade debates.

However, Mr Boyle said: “The American public is angry at what it perceives to be China ‘cheating’ on trade, rightly or wrongly. The risk of an escalation will reduce, but do not expect Mr Biden to change tact to a super accommodative stance.”

A Trump triumph

But what if Mr Trump, and his pro-business outlook, has another four years in office?

The incumbent’s first term has by and large been positive for the stock market, with the trade war having been the one key drag on performance, and an incumbent president is typically better news for the stock market.

Therefore, according to Mr McDermott, the S&P 500 was likely to rise initially following a Trump triumph.

There were also key sectors of the US economy likely to thrive under a continued Trump presidency.

Mr Somel said: “The fossil fuel extraction companies are likely to perform better, as [Mr Trump] is not looking to increase regulations and taxation on the sector.

“The same goes for the financial sector as taxation will be lower under Mr Trump than compared to Mr Biden’s higher tax-and-spend policies. The corporate sector as a whole is likely to perform better under a lower taxation scenario of a second Trump term.”

But Mr Boyle described the effect of a Trump win as “more under the surface”. He said it was more of an issue for active factor-based managers, who would have to make specific stock decisions based on the result.

imogen.tew@ft.com

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