What impact will the American election have on the financial markets?

On 8 November, Americans will decide who will hold the office of president for the next four years. The run-up to the elections has been fascinating and the outcome is anything but certain. A victory for Donald Trump is expected to have a greater impact on the economy and financial markets than a win by Hillary Clinton.

A neck-and-neck race

Earlier this year, Hillary Clinton appeared to be headed for an easy win, but in recent months, Donald Trump has clearly been closing the gap. Although the media declared Clinton the winner of the first televised debate, the fight for the presidency is still far from over. The candidates have profoundly different policy platforms. The only point they agree on is the need to invest heavily in ageing infrastructure, but in all other areas, their opinions differ widely and Trump often takes extreme positions.

The broad outlines of the Clinton and Trump election platforms

Economic impact of the election results

In our view, a Clinton victory would have little impact on the markets. After all, Clinton intends to maintain current policies for the most part.

A victory for Trump, on the other hand, would lead to higher volatility in the financial markets on the short term and, at least if Trump upholds all of his campaign promises, may also have a major impact on the world economy on the longer term. In the past, trade wars and protectionism have always led to a slowdown of global growth, mainly because companies tend to significantly reduce their investment budgets in times of uncertainty. Import duties can lead to higher inflation, which in turn impacts consumer confidence and leads to lower retail sales.

But this scenario is not likely to come to pass. Most bills have to get through the Senate. And although the Republicans are in the majority there and will probably be able to hold onto their advantage, many of Trump's fellow Republicans do not agree with his extreme positions. That’s why it's safe to assume that the decisions of "president" Trump would be considerably more moderate than the ideas of "candidate" Trump.

Impact differs from sector to sector

Certain sectors will gain more advantage from a Trump win than others.

• Technology: recovery of foreign cash positions would get cheaper. Technology companies currently have a lot of cash abroad. Trump promises that they will only pay 10% in tariffs when they bring these funds back to the US.
• Commodities: import duties on Chinese products should help American players. Particularly the steel and chemical sectors should benefit from better prices.
• Defence: Trump wants to further increase defence budgets and renew the nuclear arsenal.
• Pharma: if Obamacare is repealed, the pharmaceutical industry will regain more power. In recent years, the sector has come under pressure with the questioning of their pricing policies.
• Banks: less regulation would boost the profitability of the bank sector.

A win for Clinton, on the other hand, would be positive for:

• Sustainable energy: Clinton is very much in favour of subsidies for sustainable energy.

Pharmaceutical services: under Obamacare, service providers have benefited, to the detriment of the pharma companies.

Impact on the financial markets

If Trump wins the elections, there will be uncertainty about the consequences of his controversial proposals, and stock markets will probably see an initial correction. American stocks are relatively expensive at the moment and uncertainty could therefore lead to profit-taking. We think that such a correction would be temporary, however, and that choosing the right sectors will be crucial.

At the beginning of Trump's presidency, interest rates could fall in light of the fear of slowing growth. On the longer term, with Trump as president, there is a chance of increased pressure on interest rates to rise. After all, Trump has often criticised the Fed's low interest rate policy in the past. Most of all, he would like to see Janet Yellen step down as Chair of the American Central Bank. Higher inflation could also contribute to increased interest rates. Moreover, the repatriation of liquidities and a stricter Central Bank could cause the dollar to strengthen.

Opinion

We are assuming that the election of Trump as president would have only a limited impact on economic growth and corporate profits. These are the primary drivers of interest rates and stock markets. On the other hand, Trump's behaviour remains highly unpredictable and he is what could be called an "unknown unknown": the risk that he represents is difficult to gauge. If he is elected, it will certainly cause greater uncertainty and market volatility at first. That is why Clinton remains a safer option as president.