With the November 3 US election looming, the eyes of the world – and financial markets – are looking to America for an indication of what the final result, and potential fallout, will be.
Despite all the attention, it is worth noting that historically the results of a US election tend not to have a lasting impact on financial markets. And regardless of the uncertainty that surrounds the current election, with a bitter and divisive campaign being held during a once-in-100-year pandemic, we doubt this election will be any different.
Traditionally, equity market performance is highly dependent on the policy and not the party. But elections do tend to generate a lot of short-term noise. Fortunately, this can mean they also create investment opportunities as rising uncertainty drives increased market volatility.
Essentially, the equity market is likely to have an uninterrupted runway post the US election, underpinned by a strong growth trajectory over the next two years with no risk of rising interesting rates. Illustration: Letch
Investors should not fear election-driven uncertainty but they should be prepared to take advantage of any mispricing and be flexible enough to make changes to their portfolios when opportunities arise.
As we get closer to November 3, we expect financial market volatility to increase even more. The VIX index – a measure of expected volatility on the S&P 500 Index over the next 30 days, and the traditional measure of equity market volatility - has already increased substantially since the onset of the COVID-19 crisis.
There remains capacity for it to continue to creep even higher as the potential for a pre-election fiscal deal reduces and political uncertainty increases. This could well see the market soften into the final few days of the campaign period, in turn providing investment opportunities for those who are prepared to look through near-term risks.
It is also worth considering the policy differences in varying election outcome scenarios.
If there is a Joe Biden clean sweep and Democrats win the House of Representatives, the Senate, and the White House, fiscal policy will be highly expansionary but more targeted towards sectors that benefit from infrastructure and clean energy spending.
In this scenario, sectors such as autos, construction, and wind, solar and hydro will experience significant uplift. Corporates will face higher taxes and increased regulation. This will give a boost to the traditional value stocks whose earnings are leveraged to the sharp uplift in economic activity (albeit very targeted sectors) and possibly will result in some softness in long-duration growth assets.
If Republicans keep the Senate, the outcome will be similar regardless of whether Biden or Trump wins the presidential election. Fiscal policy will remain expansionary but will be less focused on social spending and green sectors. The status quo will remain on tax and trade and the market will probably be steady.
Overall, the outlook for equities looks very attractive regardless of who controls the White House.
The likelihood of a strong fiscal package to help the US economy recover from a COVID-19 induced slump is high.
In addition, monetary policy will remain accommodative which has been supporting asset prices and will continue to support the equity market for the next few years. There is also a high chance that we will have at least two vaccines becoming available this side of Christmas.
Essentially, the equity market is likely to have an uninterrupted runway post the US election, underpinned by a strong growth trajectory over the next two years with no risk of rising interesting rates.
We believe sectors or high-quality companies whose earnings have been deeply affected by the COVID-19 pandemic such as Sydney Airport, Ramsay Health Care, The Star Entertainment Group and Scentre Group will be top performers as the world normalises and returns to growth.
Remember most of the returns are generated through finding quality businesses rather than blanket buying across the market or sectors. In our view, the current market represents enormous opportunities in many undervalued quality businesses.
In this environment, it pays to be greedy when others are fearful.
This article originally appeared in the Australian Financial Review here.
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