US presidential election: risks and opportunities
This article draws on the insights of AMP Capital’s investment teams to reflect on the implications of the two outcomes of the US election and compares and contrasts the candidates’ policies.
The US presidential election on 8 November between Republican candidate Donald Trump and Democratic candidate Hillary Clinton is a hotly contested race. Recently there has been a widening of opinion polls, but political uncertainty remains. The potential for increased market volatility is high over coming weeks.
The details of some policies are not clear, and may not be clear for some time, particularly given control of the two houses of Congress will be a factor in determining which elements of a candidate’s policy platform ultimately become law.
Policy differences between the candidates will have some specific asset class impacts. In general, however, the perception is that a Clinton victory represents continuation of the Democratic party status quo, and associated with this is the expectation of fewer policy surprises.
The change to a Republican administration under Trump has the potential to result in more dramatic shifts in intended policies. The ability of either party to implement policy will be dependent on Congress.
US bond markets could weaken on a Trump victory, reflecting an expected increase in the budget deficit, and allow the Fed to assume a more aggressive rate hike path than currently. This has the potential to push the US dollar higher. A Clinton victory is unlikely to point to a different path for interest rates than is currently priced into the market.
Both candidates seek to increase infrastructure spending, which is one of the few areas of spending agreement. For US listed infrastructure, particularly the energy and pipeline sector, neither of the candidates have plans that would be detrimental.
For direct infrastructure, a key area to monitor is the view of each candidate on the use of private capital to fund the nation’s infrastructure development. However, this is currently unclear. Irrespective of the election outcome no immediate changes to deal flow or opportunity base is anticipated.
In general a Clinton victory, assuming a Republican-controlled Congress, would likely result in more of a status-quo environment for US real estate investment trusts (REITs). A Trump victory could see some sectors doing better, such as the office sector. Regardless of who wins, defence spending is almost certain to increase.
Historically, elections have been meaningful drivers of equity volatility. Looking back at all post-war elections (1948 to 2012), realised volatility is highest in the October of an election year than any other month during election season (July to November).
If history is a guide, increased volatility that causes increased trading volumes will likely precede the election rather than follow it. No lasting impact on liquidity of either the equity or fixed income markets as a result of the US election is anticipated.
Summary of policies
Below is a summary of Trump and Clinton’s policies.
- Trump promises personal tax cuts including a cut in the top marginal tax rate to 33% from 39%, a cut in the corporate tax rate to 15% from as high as 39% and removal of estate tax.
- Clinton promises higher, more progressive marginal tax rates, a cap on deductions, increased estate and gift taxes and a tax on high frequency trading.
- Both want to increase infrastructure spending.
- Trump wants to reduce non-defence discretionary spending by 1% a year, but increase spending on defence and veterans.
- Clinton wants to increase non-defence discretionary spending.
- Trump largely proposes protectionist policies, for example, a 45% tariff on Chinese goods, 35% on Mexican goods.
- Clinton largely supports free trade as long as the United States isn’t harmed.
- Trump wants to dismantle Dodd-Frank financial regulations, return to Glass-Steagall policies that limit the activities of large banks, audit the Federal Reserve and limit its independence and reduce industry regulation generally, particularly on US energy.
- Clinton promises tougher industry regulation, policies that favour clean energy and indicated some support for Glass-Steagall-like policies for large banks.
- Trump wants to build a wall with Mexico, deport illegal immigrants, and ensure that firms hire American workers first.
- Clinton tends to favour expanding immigration.
- Trump wants to repeal Obamacare and cut drug prices in Medicare.
- Clinton has promised to defend Obamacare, expand access to healthcare and limit drug prices.
- Trump wants to reposition alliances to put America first and get allies to pay more, would confront China over the South China Sea and would attack oil fields under IS control.
- Clinton wants to strengthen alliances and would continue the US pivot to Asia, being one of its architects.
Look out for next week's edition where we consider what a Republican or Democrat victory means for infrastructure investments.