A day before the US presidential election, Hillary Clinton appears to be ahead of her opponent Donald Trump despite a narrowing lead.
On 28 October, the Federal Bureau of Investigation (FBI) reignited controversy over Hillary Clinton’s handling of emails during her tenure as secretary of state by disclosing that new emails had to be examined. This led to a narrowing of Clinton’s lead over Trump in opinion polls. On Sunday, FBI director James Comey confirmed previous statements that Hillary Clinton doesn’t face criminal charges in this matter. It remains to be seen whether this gives her an edge for the forthcoming election on 8 November.
In any case, the election outcome is too close to call because disapproval ratings for both candidates and the proportion of undecided voters are unusually high.
The tightening of the presidential race has triggered a wave of risk aversion, with weaker equity markets and a surge in the VIX volatility index – the so-called fear barometer. For a comparison of both candidates’ respective programmes and our broad expectations for financial markets, we refer to our Investors’ Outlook published on 3 October 2016.
To sum it up, a Clinton victory would mean “more of the same” for investors and we would expect a bounce in equities in that case, especially as the economic environment has turned increasingly supportive over the summer. Global growth as well as inflation expectations have stabilised while corporate earnings appear to have turned the corner. At the same time, monetary policies remain hugely accommodative in aggregate, even though the U.S. Federal Reserve is on track to raise interest rates by 25 basis points in December on the back of encouraging employment data and inflation close to its objective.
Trump victory still a scenario to be reckoned with
Conversely, the impact of a Trump victory is much more difficult to predict. However, it is fair to say the US would likely move towards protectionism by erecting trade barriers and implementing a strict control on immigration. Everything else being equal, such a path would disproportionately hurt emerging markets and eventually stoke inflation. A surge in the budget deficit might push up US Treasury yields, offsetting investor demand for safety. How would the US dollar behave? It is probably naive and overreaching to make any forecast at this juncture. However, uncertainty would prevail until a Trump administration unveils its true intentions, which might strongly differ from the candidate’s stated proposals. Some aspects are not negative, in particular, the sharp corporate tax cuts, which would boost corporate earnings.
This is the reason why we consider it inappropriate to run an excessively cautious stance in portfolios. We are neutral towards equity markets and have raised cash balances. We also hold significant exposure to gold and inflation protected government bonds, which we believe should offer proper diversification. Obviously one needs to closely monitor events and keep flexibility with respect to portfolio positioning. For instance, in case of a very tight race, one cannot exclude that one of the candidates requests a recount.
Comment by Christophe Bernard, Vontobel Chief Strategist