Toss of a coin

With the race to the White House nearing the finish line, our Chief Investment Office explains why it remains as focused on the long-term market implications that may stem from the election, as it does on the short-term volatility that may present in the weeks ahead.

Globally, ‘the election year’ has primarily centred on one contest: the race for the White House. Since the start of this year, news has been saturated with the economic fallout and market implications that may follow the election.

Given the policy differences between the two candidates, one well-respected investment strategist has even labelled it the most investable US election in history – we don’t disagree. Indeed, the race for the White House has shaken currencies, bonds and equities. But, picking the winner remains a coin toss, so positioning aggressively ahead of an unknown outcome is entirely incongruent with our long-term investment philosophy.

Nonetheless, we have been closely watching the campaign trail and assessing the potential implications of a Democratic sweep, Republican wave, and the more probable outcome of a divided Congress. More specifically, we have been considering how this may impact portfolio positioning in the immediate aftermath and any longer-term ramifications for portfolios.

All manner of outcomes

We won’t delve too far into the potential make-up of Congress, nor the likelihood of whether Kamala Harris or Donald Trump will preside over the ‘free world’ – as the chart below shows, all outcomes remain possible – particularly given the known issues with polling.

2024 US election balance of power projections

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A divided government – or at least one ruling with a slim majority seems most likely. The Republicans currently hold the House of Representatives by a thin margin; however, as of 1 November, The Economist’s forecasting model suggests the Democrats may escape with a narrow majority.

In the Senate, things appear to get harder for the Democrats and path to victory looks contingent on several upsets. According to that same model, the Republicans should take the Senate, but it is unlikely either party will come close to securing the 60 votes needed to pass the majority of legislation in the Senate.

While this makes governing more difficult, as witnessed during Trump’s tenure as the 45th president, changes to trade, foreign policy, regulation and immigration could still be enacted under Executive Order.

The policies set to drive market direction

Immigration

Although both candidates have outlined intended changes to immigration, Trump’s are more extreme and are expected to be implemented under Executive Order. These include the deportation of approximately 11 million unauthorised migrants and a reduction in immigration numbers. Harris, on the other hand, wants to tighten eligibility criteria for asylum seekers but increase the number of green card and family visas. Of course, as with all election promises there remains an unknown as to what may end up being enacted versus what has been promised to appease the supporter base.

From an economic perspective, immigration has been shown to increase productivity, keep wage pressures in check and according to the Congressional Budget Office (CBO), have a net positive impact on the government’s budget balance.

Trade and tariffs

Trump has unveiled plans for a 10-20 per cent universal tariff and an additional tariff of at least 60 per cent on Chinese imports. That said, it is worthwhile noting that most of the tariffs enacted under Trump’s previous administration have been retained by Biden, with the rate on tariffed goods reaching a high of almost 9 per cent in 2020. According to Tax Foundation estimates, the average tariff rate on all imports could reach almost 18 per cent in 2025, raising roughly USD270bn per year in revenue. However, an IMF study suggests these tariff increases may also come at the expense of productivity and result in higher unemployment.

Tax and Debt

The current US net debt-to-GDP ratio (gross debt excluding interagency debt) sits at 99 per cent. According to the CBO this is projected to grow to 125 per cent by the end of FY 2035.

Where tariffs and immigration may be enacted under Executive Order, changes to spending and taxes will require Congressional approval.

Trump’s major priority is tax cuts for businesses and households, whereas Harris is focused on raising corporate taxes and providing cuts for low-to-middle income households. According to the Committee for Responsible Federal Budget’s central estimates, Harris’s policy plan would push debt-to-GDP to 134 per cent by FY2035, while Trump’s would see it lift to 143 per cent by the same time.

The bottom line:

Universal tariffs under a Trump Presidency would likely prove inflationary, with targeted ones also delivering price pressures – albeit to a lesser degree. Moreover, tariffs may also provoke tit-for-tat retaliation, leading to heightened uncertainty and volatility for markets.

While both candidates will ultimately be inflationary, it is the potential speed of a return to a more inflationary environment that would be more concerning under a Trump Presidency – something already reflected in USD strength and bond yields that have risen alongside Trump’s increasing odds of securing office.

Bond yields and the USD have moved higher alongside Trump’s odds of winning

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Significant changes to trade policy are also likely to have an outsized impact on where earnings and growth are accrued globally, meaning investors will need to be selective when allocating capital across regions and sectors. Multinationals may suffer under Trump, while corporates earning the majority of revenue onshore may outperform, at least initially.

Sectors such as Healthcare would be likely beneficiaries under a Democratic sweep, while Financials and Energy could be winners from Trump deregulation and a broader push for energy security. And while China could see some relief from a Harris salute, the impact across other emerging markets will likely vary depending on potential supply chain reorientations. Here, we see India as a likely beneficiary under Trump, whereas Mexico could come under pressure.

Potential winners

Trump: Indian shares, US dollar, US domestic focused firms, Energy, Tech, Financials

Harris: Chinese stocks, Mexico, Healthcare, value shares, bonds

Volatility ahead

We expect increased volatility in the immediate aftermath of the election, and depending on the result and make-up of Congress, possibly the weeks and months that follow.

While investment opportunities will present during this time, extremely short-term trading within long-term portfolios is difficult to time and typically fraught with risk. As the 2016 US election and BREXIT proved, investors risk being caught on the wrong side of a trade if positioning too aggressively ahead of a binary outcome. 

Rather, we seek to identify market dislocations amid the volatility and adjust portfolios to take advantage of opportunities within those sectors and regions where fundamentals remain sound, yet market pricing has become detached.

While there will be significant market noise in the period ahead as investors digest the election outcome, we remain focused on our near-term view, specifically that the prospect of lower rates, positive seasonality, and an expected soft landing should provide a more constructive backdrop for risk assets over the latter part of the year and early next.  

Further out, the potential sugar hit from increased spending may prove short-lived if the US Federal Reserve is forced to react aggressively to resurfacing inflationary pressures – possibly leading to market vulnerability in 2025.

Longer-term, we expect the 2024 election to further amplify structural issues including rising protectionism, worrying debt levels and an already fractured nation. In our view, these issues will further contribute to what we expect to be a period of upwards sloping inflation, higher resting interest rates and more sustained volatility.

What this means for our diversified portfolios

A core diversified long-term investment strategy, aligned with an investor’s risk profile remains critical to navigating periods of market uncertainty. In addition, we continue to advocate for allocations to alternatives and private market assets with return streams and defensive characteristics that may not be so closely tied to the vagaries of the business cycle and exogenous events.

Indeed, after doubling our allocation to alternatives during our most recent strategic asset allocation review to prepare for the structural changes ahead, we remain committed to identifying further private market opportunities that may be complementary to clients’ core multi-asset portfolios.

While the US election remains our primary focus in the weeks ahead, we have continued to make tactical trades to portfolios in the lead-up to the election, specifically across areas where we believe market pricing has moved beyond fundamentals.

With market momentum remaining strong since the early August sell-off, we continued to trim our position to Chinese shares, taking profits and moving our position to below benchmark.

The sharp rise in Chinese shares followed the suite of stimulus announcements, that while promising, appear to have so far done little to improve aggregate demand. These same announcements also provided a boon for the Australian market while providing little meaningful change to the domestic earnings outlook.

While the Australian market is cheap relative to some global peers, the earnings outlook appears modest, and we see better opportunities elsewhere within risk assets. We have cut our exposure to a mild underweight from benchmark previously.

The proceeds from these sales have been invested into broader emerging markets, where despite the uncertainty surrounding the US election, valuations remain relatively attractive, and performance is less likely to be tied to a need for further stimulus.

Additionally, we increased our position in listed global real estate and infrastructure – where fundamentals and the macro-outlook also appear more favourable.