Anatomy of an Election (So far…)

John Leiper – Chief Investment Officer – 9th November 2020

The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds.

By Tuesday morning, as the first results started to trickle out of voting stations, it seemed President Trump would perform much better than anticipated. The narrative turned decisively with Florida, a key swing state, which Trump retained on an increased margin compared to 2016. The market reaction was swift, as evidenced by the 10-year Treasury yield which, having risen to 0.93%, plummeted to 0.72%, in one of the biggest post-election rallies since 2000.

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Trump’s victory in Florida was largely attributable to Latino voters in Miami, who proved particularly receptive to Trump’s likening of Biden to the despised socialist leaders of various South American countries. Whilst this strategy worked well for the Sunshine State, it likely held less predictive power for the rest of the country.

Trump claimed pre-emptive victory late on Tuesday evening but by Wednesday morning it seemed increasingly apparent that Biden’s strength in mail-in ballots could tip the scales back in his favour. The narrative shifted, to a Biden Presidency and Republican-held Senate, which was interpreted by investors as the best possible outcome for markets. That might seem counter-intuitive given the current health and economic crisis and reduced expectations for fiscal stimulus from a divided government. Whilst that is true, particularly if the pandemic worsens over the winter months without progress on a vaccine, markets focused on the clear benefits to corporate profits via the reduced likelihood of higher taxes or tough regulatory action on big tech, banks and healthcare companies. As a result, US equities rallied aggressively, with the S&P 500 delivering its best one-day gain since June. At the time of writing, that approach seems justified given the positive news on a potential Pfizer vaccine.

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On Saturday, news broke that Biden had taken Pennsylvania, by a margin of less than 1% of the vote. By doing so he had won the 20 electoral college votes required to secure the election. The reduction in perceived risk is positive for risk assets and at the time of writing, Asian markets and US futures are all notably higher, led by clean energy stocks (up almost 8%) which stand to benefit from a Biden presidency. The portfolios hold a sizeable allocation to this theme via our ESG bucket.

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That said, markets may be underestimating Trump’s reaction and potential next steps. Trump has no intention of throwing in the towel as evidenced by the latest campaign memo and we are actively aware of five lawsuits pending, and one potential addition thereto, across Pennsylvania, Wisconsin, Michigan, Nevada, Georgia and possibly Arizona.

The opportunity for uncertainty is time limited as all disputes must be settled by the 8th December. Absent some revelatory legal breakthrough, the odds are that, come January, Biden will be in the White House and the Senate will remain Republican. Compared to expectations heading into the election this outcome is markedly less reflationary. However, given the current environment we still think some form of fiscal stimulus will be agreed over the next few weeks, likely a ‘skinny’ bill for $500 billion – $1 trillion. This means the Fed will need to pick-up the slack and could go even more aggressive on monetary policy: lower (interest rates) for longer and further (stimulus) for longer. That is potentially bearish for the US dollar which currently sits on a key technical level. 

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President Biden will likely prove less bellicose and arbitrary on trade policy and there are no clear signs that his predecessor’s policy was effective at reigning in Chinese economic expansion. Further, with the Chinese yuan at a two-year high, the prior argument for currency manipulation is, for now, off the table.  A clear beneficiary of US dollar weakness would be emerging markets where we see considerable scope for catch-up growth. We are positioned accordingly via an overweight allocation to local currency emerging market equities and bonds.

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To finish off, I want to flag a developing possibility, not yet priced into markets. As mentioned above, current consensus is for a split ticket between the White House and Congress. However, because neither Republican incumbent achieved 50% of the vote needed to win outright, Georgia will now hold run-off elections in January. If the Democrats can win both seats, the parties would tie 50-50 with vice president Kamala Harris casting the deciding vote, a de facto clean sweep. Georgia is traditionally a red state and it might be that the incumbent senator will put pressure on the Republicans to agree to a larger stimulus package to dent Democratic momentum following a Biden win. Whatever the outcome, the final race of the election has the potential to once-again change an ever-evolving narrative with clear repercussion for asset allocation decisions.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

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