The upcoming U.S. elections are causing global markets to navigate complexities, but international equities are expected to perform well as tariff risks decrease.
Analysts favor U.S. and emerging market equities due to their strong earnings profiles, while expressing caution towards European equities.
The recent increase in yields presents attractive opportunities, but the potential risks associated with the election outcome suggest that patience is necessary.
In the foreign exchange market, the Japanese yen, Brazilian real, and South African rand are favored currencies.
It is advisable to hedge against global emerging market exposures, particularly with the expected strength of the U.S. dollar against the Chinese yuan and euro if tariffs increase under a Trump administration.
The outcome of the U.S. presidential election is anticipated to have significant implications for various asset classes. Regardless of the winner, the U.S. economy is expected to remain healthy, with GDP growth projected to be 3.4% in the third quarter.
Inflation is rising, and a rate cut by the Federal Reserve is expected by year-end, creating a favorable environment for risky assets.
Market analysts are closely monitoring four potential election outcomes, each with its own implications for asset performance.
A Republican victory, known as a "Red Wave," is expected to have the most impact on markets. In the event of a Republican win, tax cuts may be extended and corporate tax rates reduced.
However, the details of Donald Trump's customs policy are uncertain, and the revenue implications of tariffs are unpredictable. A second Trump administration could intensify import substitution policies, potentially widening the budget deficit.
While tax cuts and deregulation could benefit the economy, rising tariffs and increased bond yields due to deficit expansion could complicate the outlook for risky assets. Despite these challenges, U.S. equities are believed to have more favorable factors than negatives when a "Red Wave" is anticipated.
The "Red Wave" scenario is expected to have adverse effects on duration, as widening deficits and inflationary policies could lead to rising bond yields. This environment may create challenges for international equities due to trade uncertainties.
Investors are advised to consider the implications of the election outcomes on their portfolios and manage risks accordingly. The interplay between fiscal policies, trade relations, and macroeconomic indicators will be critical in shaping market dynamics as the election date approaches.
The potential for a rebound in emerging market assets under a Kamala Harris presidency adds complexity to the investment landscape. Ultimately, investors need to stay informed and agile in their strategies as the implications of the U.S. elections extend beyond domestic borders.