The economic outlook remains strong as the US presidential election approaches, with Q3 GDP growth reported at 3.4% by the Atlanta Fed. This positive economic backdrop, along with favorable corporate earnings forecasts, suggests that risk assets could perform well in 2024, regardless of the election outcome.
A clear Republican victory could have significant implications for fiscal policy and market dynamics. It could lead to an expansionary fiscal environment, characterized by tax cuts and increased budget deficits. The Tax Cuts and Jobs Act (TCJA) may see extensions and modifications, potentially lowering the corporate tax rate to 15%. However, the feasibility of implementing these changes is uncertain, especially considering the complexities surrounding tariff policies and their revenue implications. The anticipated increase in tariffs under a Trump administration could further complicate the economic landscape and introduce risks for investors.
In terms of asset class performance, global equities are projected to finish 2024 strongly, regardless of the election results. A Trump victory is expected to favor US equities, while a Harris win could lead to a resurgence in emerging market assets due to reduced tariff risks. The relative performance of these asset classes will be closely tied to the election outcomes, and investors are advised to manage risks and position themselves strategically ahead of election day.
Emerging markets are currently viewed favorably, supported by positive earnings and a political turnaround in China. However, the short-term outlook is clouded by the potential impact of the US election, which could weigh on emerging market bonds. A stronger US dollar and rising US yields may increase financing costs for these markets, although many emerging market issuers continue to exhibit solid credit fundamentals in the medium term. The performance of these assets will depend on the interplay between domestic economic conditions and global market dynamics.
In terms of currency dynamics, the US dollar is expected to continue outperforming. The favorable economic conditions in the US provide a strong hedge against tariff risks, making long positions in the USD against the Chinese yuan (CNY) and the euro (EUR) an attractive strategy. On the other hand, the euro is expected to underperform due to relative interest rate differentials favoring the US, while the Japanese yen (JPY) is projected to strengthen due to favorable valuations and necessary monetary policy adjustments.
In the bond market, global government bonds are currently seen as neutral, with improved valuations making duration more appealing. However, a clear Republican victory could lead to a sharp rise in yields due to concerns over budget deficits and inflationary pressures. US Treasuries are also expected to remain neutral, with easing inflation potentially offsetting strong growth and the risks associated with wider budget deficits. In contrast, European Bunds and UK Gilts are considered attractive investments, supported by expectations of weak growth and slowing inflation.
The commodities market is expected to remain stable, particularly in the oil sector, where geopolitical tensions in the Middle East are unlikely to significantly disrupt supply. Brent oil prices are projected to stabilize within a range of USD 70 to 80. However, stimulus measures in China may provide less support for base metals compared to previous years. The overall outlook for commodities will be influenced by global economic conditions and the evolving political landscape.
As the election date approaches, market participants are advised to remain vigilant and adaptable. The potential for exaggerated market reactions to election outcomes requires a proactive approach to risk management. Investors should consider the implications of various scenarios, including the potential for a clear Republican victory, which could bring both opportunities and challenges across asset classes. The interplay of fiscal policies, trade dynamics, and global economic conditions will ultimately shape the investment landscape in the coming months.