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Markets brace as US election looms


On November 3, US voters will head to the polls in what has become one of the most volatile elections in the country’s recent history, with Democratic presidential candidate Joe Biden hoping to oust Republican incumbent Donald Trump.

While at the start of the year many were expecting a close-run election, with Trump favoured to win re-election on the back of a healthy stock market and incumbent advantage. However, the coronavirus pandemic, social unrest and a collapsing economy have seen Biden maintain a polling lead over the president unprecedented in modern times.

WATCH: Davide Bosio reports ‘risk-off’ appetite in run-up to US election

Polling averages with less than a week before election day put Biden at around 51% of the national vote compared to just under 43% for Trump. Biden is also leading in a number of key battleground states that will decide the election such as Pennsylvania, Wisconsin and Michigan, all of which went for Trump in 2016.

With such a commanding lead in the polling, the Democrats are also hoping that they will be able to take control of the US Senate from the Republicans, who currently control 53 seats in the 100 seat chamber. A so-called ‘Blue Wave’, where Democrats control the Senate, the House of Representatives and the presidency, would allow the party to exert substantial control over policy and law-making with little former Republican opposition.

However, repeated (albeit unfounded) accusations by Trump that the election will be rigged if the results do not fall in his favour, as well as the recently installed 6-3 conservative majority on the Supreme Court have many voicing concerns that election day and its aftermath could see social unrest across the US, particularly in the event of a close and/or unclear result.

“The biggest risk to investors is likely to come if there is not a smooth transition of power and the outcome of the election is contested, which is likely to cause an extended period of volatility on US financial markets. A major dip in the stock market, however, could prompt the Federal Reserve to step in with extra stimulus to stem a dramatic sell-off. Although Congress has so far failed to reach an agreement on an emergency plan to inject cash into the US economy, it was partly under an expectation of fresh spending that the tech sector made up ground from its September slide”, said Susannah Streeter at Hargreaves Lansdown.

“The key is to spread the risks so your holdings aren’t over-dependent on one US election outcome or the other to prosper…Given, the potential of a contested election and an extended period of volatility, investors may also want to consider widening a portfolio to contain defensive stocks like utilities, insurers and other assets considered a safe haven such as gold, which could also act as a hedge against a possible rise in inflation down the road if a large stimulus plan is agreed. But it would also be prudent to maintain a healthy cash balance, as a buffer against unforeseen consequences.’, she added.

Biden win could bring both good and bad news

If Biden manages to secure to victory in the election, which based on current polling appears to be the most likely outcome, earnings compression could be seen across multiple firms, however, investors could take advantage of what is likely to be a heavy stimulus package to boost the US economy out of its slump.

“If former Vice President Joe Biden wins the upcoming election and the Democrats also control Congress, his corporate tax plans alone could result in a 7-8% decline in [S&P 500] earnings. However, on the flipside, a ‘blue wave’ could result in significant stimulus – potentially upwards of US$3trn. While stimulus of such size may have repercussions needing to be dealt with three or four years from now, in the immediate term, it would clearly result in higher growth”, said Taymour Tamaddon, a portfolio manager of the T. Rowe Price US Large Cap Growth Equity Fund.

“This stimulus is why equity markets are not pricing in the clear negative implications of higher taxes. In addition, there is a belief not all the tax changes Biden is proposing would be enacted. In any event, the Senate race is going to be remarkably close, and if we see a ‘blue wave’, Democrat senators from historically Republican states may not be comfortable with significant tax increases”, the portfolio manager added.

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