Market
An investor’s guide to the US presidential election
We assess the key differences between Donald Trump’s and Kamala Harris’s policy platforms, and highlight the potential implications for the financial markets.
Both the UK election and the US-China Phase 1 trade deal promise to bring far more clarity for businesses as they plan for 2020 and beyond. This could be a welcome gift for the economy and the stock market, but it’s important to remember that nothing is a “done deal.”
Two developments last week suggest that we have entered a period of improved economic policy certainty. Both the UK election and the US-China Phase 1 trade deal promise to bring far more clarity for businesses as they plan for 2020 and beyond. If so, this could be a welcome gift for the economy and the stock market as we enter the holiday season.
Thanks to a Conservative Party landslide in the Dec. 12 UK Parliamentary election, we expect Brexit can be completed by the end of January, but trade negotiations on the future relationship of the UK and the European Union may be stretched out beyond December 2020. At this point, it looks possible that the UK may exit the EU’s single market (which allows for the free movement of goods and services among the different countries in the EU), but remain in or align with the customs union (which establishes a common system of tariffs and import quotas for trading with non-members).
As the details solidify, I would expect to see a gradual and sustained recovery in investment and a reversion to a higher growth rate that is somewhere between that of the eurozone and that of the US (even if it is slower than pre-Brexit economic growth). If so, sterling is likely to consolidate some further gains, but still at a discount to pre-Brexit levels. Gilt yields could move somewhat higher still. Equities are likely to rise significantly. With uncertainty easing, the Bank of England might even attempt to catch up to the global easing frenzy with a rate cut.
The day after the UK election, it was announced that the US and China have agreed on the first phase of a trade deal — a development that I believe should be very positive for a number of industries.
This Phase 1 deal includes several items that could benefit US industries:
Going forward, the rollback of additional existing tariffs over time is expected as well — — although this is far from certain. If these rollbacks were to occur, one likely beneficiary is the auto industry (US and German auto companies).
Overall, the Phase 1 deal should be positive for business investment because it reduces economic policy uncertainty, and increased business investment should benefit the global economy. I expect this to create an upward bias for stocks globally — especially for Chinese equities, which in my view have been unfairly beaten down in the last several years.
While increased certainty around Brexit and a Phase 1 US-China trade deal are both very positive developments, nothing is a “done deal.”
There remains some uncertainty on the approach UK Prime Minister Boris Johnson will take going forward. Commentary over the weekend was divided on whether or not Johnson will soften his Brexit stance. Some argue he will because he is no longer beholden to the ERG (an alliance of pro-Brexit Conservative Members of Parliament) and Nigel Farage (leader of the Brexit Party). On the other hand, others argue he will want to stick to his promise of ending the transition period by the end of 2020).
The Phase 1 deal has not been signed, and there is still a possibility that the agreement in principle could be derailed:
In conclusion, last week’s developments are very positive. However, until Brexit is completed and a Phase 1 trade deal is signed, there is the potential that uncertainty could spike again. In our view, this means that while maintaining a diversified portfolio with adequate exposure to risk assets is important, it’s also critical to plan for the potential for higher volatility in the short term.
In celebration of the holiday season, Weekly Market Compass will not publish for the last two weeks of the year. We’ll be back on Jan. 6. Happy Holidays to you and yours!
An investor’s guide to the US presidential election
We assess the key differences between Donald Trump’s and Kamala Harris’s policy platforms, and highlight the potential implications for the financial markets.
Global Fixed Income Strategy Monthly Report
In our regularly updated macroeconomic analysis we offer an outlook for interest rates and currencies – and look at which fixed income assets are favoured across a range of market environments.
Harris versus Trump: What do political strategists think? Takeaways from our webinar
The US presidential race between Kamala Harris and Donald Trump is intensifying. Discover what political strategists had to say about the race in our post-debate US election webinar.