“The market has clearly priced in, to a larger extent, a Hillary victory, which is understandable as that is what most of the polls are saying,” said Andrew Milligan, global head of strategy at Standard Life Investments in Edinburgh. “As the result of the election has become less certain, risk assets have come off. The past week has been a test run, but a Trump victory is certainly not priced in, and even more so after the FBI statement.”
The US Federal Bureau of Investigation said on Sunday that there was no evidence of criminality in the latest haul of emails it has examined, belonging to a Clinton aide.
European stocks rose sharply on Monday in what one head of EMEA ECM called “an FBI rally”. The Euro Stoxx 50 jumped 1.5% as soon as the market opened and climbed further to close up 1.9%.
The US market rose 2.1% in the first two and a half hours of trading.
“Obviously the FBI helps,” said a European equity syndicate banker on Monday. “Volatility has been very high recently. The outcome seems to be more predictable than it was a couple of days ago, so that improves the market conditions. But things can change very rapidly, so until Wednesday we are likely to have quite a bit of volatility in the market.”
Although many equity specialists believe, and hope, that Clinton will win, few are cheerily confident. “I’ve been of the opinion that it would be closer than people thought,” said Thomas Trimborn, director of global equities at Allianz Global Investors in London. “Trump’s supporters are more passionate and Hillary’s supporters are more lukewarm. It could very well be that she doesn’t get the turnout that the polls are predicting. If there is a surprise Trump victory, we’ll likely see a sell-off in equities. However, from a longer term perspective, it’s really about the economy and what the Fed is going to do.”
The election’s effects will stretch far beyond the US. “Because the American market tends to lead everything, it wouldn’t be isolated to the US,” said Mark Dampier, head of investment research at Hargreaves Lansdown, the UK retail investment service. “If Clinton gets in there will be a relief rally, though it also depends how Congress is split. If Trump gets in — I don’t think he will, but if he does — I would expect a Brexit-type position, which in my view would be an excellent opportunity to buy in.”
The syndicate banker was gloomier. “My feeling is if Trump wins there will be a global sell-off,” he said. “It would create so many uncertainties on so many things — he wants to get rid of the head of the Fed. I don’t know if it will be 10% or 15%, but I would expect a fairly strong correction. After that there would be strong volatility. That guy is a bit unpredictable, so no one would know what he would be doing. I don’t think it would be good for the markets.”
Trump’s protectionist leanings would hurt European companies, he added. “It will make life very difficult,” he said.
Blocks possible
The latest development in the US election race, with the FBI clearing Clinton, meant there was a potential opportunity for block trades in Europe on Monday night. “I think it depends on how the market trades for the rest of the day,” said the ECM head on Monday morning. “Somebody might try and do something.”
Last week five block trades totalling €1bn came to market on Thursday evening. At least some of the sellers were keen to bring their deals before the US election, said a banker who specialises in block trades, who added that there could be another window for sales on Monday.
However, the evening came and no trades emerged, even though the S&P 500 had made up its last four days of falls and more than half of the slippage since it began its longest losing streak for since 1980, on October 25.
Tuesday will almost certainly be barren of opportunistic equity business because the US will be voting. A post-election rally would bring a fresh crop of sellers out.
However, investor appetite this autumn for European ECM deals has anyway been weak and patchy. “I don’t think people are scared about the election, I just don’t think there’s a catalyst to invest,” said the head of EMEA ECM at another bank. “Markets are down for the year, no one has significant gains to play with to take risk, and there’s no catalyst to invest before the election. You would be taking the risk that Trump wins and there is a sell-off. A Hillary victory is pretty priced in. Even after the election, it’s been a tough year so people are going to have a tough time putting money to work.”
Effects to keep coming for months
The firm consensus is that equity markets’ initial reaction on Wednesday will be up if Clinton wins, down if Trump does. “If Hillary gets in, it’s the status quo, which is not a good thing for Trump supporters, because they want to blow up the system,” said Trimborn. “But it will be better for the markets and the continuation of the economic recovery, which will hopefully flow through to corporate earnings growth.”
But very quickly, investors will have to start grappling with less binary and more complex issues. The extent to which either candidate is free to influence events will be constrained partly by the Congressional election taking place alongside the presidential one.
“There is a rather large set of scenarios,” said Milligan. “What ability does either candidate or party have to push through their programme, and which aspects do they focus on? Does Mrs Clinton really focus on pharmaceuticals and healthcare? Does Trump really cut taxes and go for emerging markets, as he’s suggested?”
Whether the winner gets a convincing majority of the popular vote and electoral college will influence how strong she or he is as a president — and whether both houses of Congress remain under Republican control, and by how much, will also be hugely important.
The main comfort for those who fear Trump is that checks and balances in the US system might mean he cannot do much. “Politicians say a lot before they get elected, but they don’t do a lot after,” said Dampier. “Trump is a businessman, he hasn’t got a clue about politics or what he’ll be able to do.”
The risk of gridlock in domestic policy means either candidate could be forced to devote more time to foreign policy. “Outside countries will test them,” pointed out Milligan. “They’ll want to know what is the mettle of the new candidate, and how much room for manoeuvre they’re going to have.”
That might comfort investors in US stocks, who fear state meddling in the economy — but could be bad news for equities elsewhere, if the risk of confrontation rises.
Hard to pick winners
Working out how to play the election, sectorally, is more difficult than it might seem when the candidates are so different.
“You’ve got to get two things right — the event itself and then its effect on assets,” said Dampier. “One is usually wrong. Investors turn themselves upside down trying to work out what to do but it’s far better not to try and say ‘healthcare will be clobbered if Clinton wins’. It’s better to stick with some good quality funds.”
Milligan argued that both candidates were quite likely to increase defence spending, which has been capped for some time.
“Irrespective of the outcome… an increase in fiscal spending is likely as economic growth remains challenged,” wrote UBS equity strategy analysts last Thursday, in a research piece designed to pick likely US stock winners from the election.
Infrastructure, defence and healthcare could all benefit from state largesse. UBS picked half a dozen banks, including KeyCorp and Fifth Third Bancorp, defence stocks like Raytheon and General Dynamics and industrials like Ingersoll-Rand, which makes heating and air conditioning systems, and rail freight group Norfolk Southern Corp.
Whatever the outcome, the US election will not be all over bar the shouting by the end of this week.
“There could be an earthquake on Tuesday, but this is not a single event,” said Milligan. “This is a series of shocks, and it’s the market’s job to try and understand and price them as quickly as possible, which is not going to be easy.”