As the US presidential election approaches, market participants are preparing for potential changes in asset performance based on the electoral outcome. The current economic landscape is characterized by strong growth, with Q3 GDP tracking at an impressive 3.4%. This economic strength, coupled with positive corporate earnings and guidance, creates a favorable backdrop for risk assets.
The potential for a Republican sweep, which is increasingly seen as a significant possibility, could have significant implications for the markets. This scenario is expected to be the most fiscally expansive, with candidates likely extending the Tax Cuts and Jobs Act (TCJA) and potentially reducing corporate tax rates to 15%. Such moves could lead to a widening of the US budget deficit, raising concerns among investors about the trajectory of US debt. The implications of tariff policies under a Trump administration remain uncertain, particularly given the legal questions surrounding executive-driven tariffs and potential congressional pushback.
A Trump victory could result in a wave of deregulation and tax cuts, which may stimulate the US economy. However, this scenario also carries risks, particularly in the form of increased tariffs that could complicate trade relationships and lead to inflationary pressures. The combination of these factors creates a mixed outlook for risk assets, with potential benefits from deregulation countered by challenges from tariff-related uncertainties. Historically, US equities have tended to perform well during periods of heightened Republican probabilities, suggesting that market sentiment may lean towards optimism in the event of a Trump win.
On the other hand, a victory for Kamala Harris could shift the focus towards emerging market assets, as reduced tariff risks may make them more attractive. This scenario could lead to a more balanced approach to fiscal policy, potentially stabilizing the budget deficit while promoting growth in emerging markets. The interplay between these two electoral outcomes highlights the importance of managing risk and positioning portfolios to take advantage of potential market overshoots.
The broader global market landscape is also influenced by ongoing challenges in various sectors. In Japan, corporate reforms and solid earnings are being offset by a strengthening yen, which poses challenges for exporters. Emerging markets are viewed positively, particularly with China's policy pivot suggesting further upside over time. However, the potential for a Trump victory and associated tariffs presents a near-term risk that could impact these markets.
In the fixed income space, global government bonds are currently seen as neutral, with improved valuations making duration more attractive. However, a Republican sweep could lead to a sharp rise in yields due to concerns over fiscal deficits and higher tariffs. US Treasuries are similarly neutral, as inflation moderation offsets strong growth, while risks of larger fiscal deficits loom. In Europe, Bunds are overweight due to persistently weak growth and slowing inflation, suggesting that the market may revise its estimate of the neutral rate lower.
The currency markets are also poised for potential shifts, particularly with the US dollar expected to benefit from ongoing economic outperformance. Long positions against the Chinese yuan and euro may serve as effective hedges against tariff risks in the event of a Trump victory. Conversely, the euro is underweight as relative interest rate differentials continue to favor the US, while the Japanese yen is viewed positively due to the need for a more hawkish repricing of the Bank of Japan's policies.
In the commodities space, the outlook remains neutral, with the Middle East conflict unlikely to disrupt oil supply in the near term. Brent crude is expected to remain within a USD 70-80 range, while China's stimulus measures may provide less support for base metals than in previous cycles. This highlights the importance of monitoring geopolitical developments and their potential impact on commodity prices.
As the election draws closer, market participants are advised to remain vigilant and adaptable, as the outcomes could significantly influence asset class performance. The interplay of fiscal policies, trade dynamics, and global economic conditions will shape the investment landscape in the months ahead, making it crucial for investors to stay informed and prepared for potential market shifts.