US election: funds weigh in

Later today, US voters will vote for a new President, in one of the most controversial, uncertain elections in memory – and the asset management industry is similarly tentative on the outcome.

David Riley, head of credit strategy at BlueBay Asset Management, said a victory for Hilary Clinton will be greeted by the market with relief.

“The outcome of the US Presidential election is of far greater global significance than the UK referendum on EU membership, but the Brexit vote nonetheless may prove instructive as to the short-term market reaction to a Trump victory,” he added.

“Irrespective of the vote on Tuesday and the market reaction on Wednesday and beyond, the fracturing of popular support for the economic and political status quo is raising the political and policy risks faced by investors.”

The short-term market reaction to the Brexit vote was “surprise”, and “dismay” with global stocks down 7% and a rally in ‘safe haven’ assets such as US Treasury bonds and the yen. This sell-off in risk assets proved short-lived, especially for emerging markets, although the post-Brexit fall in ‘core’ government bond yields was only fully unwound last month.

Jan Dehn, head of research at Ashmore, says neither outcome in the US election will impact emerging market outperformance moving forward, although short-term dynamics will differ depending on who wins.

“Emerging markets look poised for continued outperformance due to improving absolute and relative fundamentals, higher yields and sound technicals. The short-term market dynamics may be different depending on who becomes the next US president, but we expect the winner to be inevitably and severely constrained both politically and economically,” he said.

If Donald Trump wins, Dehn said risk aversion rises temporarily and emerging may underperform in the initial market reaction.

“Investors should fade the sell-off immediately after the election and add emerging markets and global high yield,” he said.

“He would have the support of the House of Representatives, and seek to cut taxes for corporates and aim to develop more infrastructure investment. Forget the wall with Mexico and other anti-immigration rhetoric. Actual policy changes will be slow and less extreme than expected.”

Should Hillary Clinton win, he expects a broad-based relief rally with possible significant EM outperformance.

“Investors should fade the rally in the most expensive markets, that is the QE-buoyed markets, but remain long EM, which remains the better place to be invested in what is likely to be a status quo environment,” he said.

“We expect her presidency to born under a cloud of controversy due to the email scandal, which is likely to rear its head again despite a late reprieve from the FBI. She will start her presidency as one of the least trusted presidents in history. She will seek to raise taxes for the rich but since she may not be able to achieve much domestically she is likely to focus on foreign policy.”

©2016 funds europe



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