03rd October 2016
We believe markets are under-pricing the risk of a Trump upset next month. Our best judgement is a 5%-10% global equity market pullback would be likely in the event of a Trump surprise.
A contested election is also a non-trivial risk investors need to be mindful of. Accordingly, as per our recent commentaries, some precautionary cash holdings remains a prudent course in our view.
Our base case remains a Clinton victory with a divided congress (Democratic Senate, Republican House). Either way, the reaction of the bond market will be something we watch closely. Both Trump and Clinton are spenders – and bond yields could well move higher to reflect long term deterioration in the US fiscal position.
A Trump victory would benefit the financials and energy sector. Emerging markets could struggle on fears of a trade war. We see a Clinton win as more of a status quo outcome. That said, a clean sweep of the House and Senate would be a surprise, leaving pharmaceuticals, financials and energy vulnerable to a dent in sentiment.
Distance does not infer New Zealand immunity from this election. Our worst case scenario would be a Trump victory with an attendant rise in US bond yields. This would hit New Zealand equities directly through our interest rate sensitivity, and indirectly though fears of a global trade war.