US presidential election: building bridges versus erecting walls

Some six weeks before the US presidential election on 8 November, the race between Clinton and Trump remains surprisingly close.

US presidential electionA handy image to summarise and juxtapose the two campaigns for the US presidential election could be “building bridges“ versus “erecting walls”.

The first theme is embraced by Democratic candidate Hillary Clinton, the second one is emblematic of her Republican adversary Donald Trump. Which of the two will draw more support from the American public on 8 November seems unclear at this stage.

We have therefore reduced our equity exposure to neutral as post-election turmoil cannot be ruled out.

Some six weeks before the US presidential election on 8 November, the race between the Democratic contender Hillary Clinton and the Republican candidate Donald Trump remains surprisingly close. Even though Clinton appears to have slightly extended her lead after the first TV debate, the margin is too narrow for us to be certain of the election outcome.

Regarding foreign trade, immigration and foreign relations, Hillary Clinton broadly stands for a continuation of current American policies. By contrast, Donald Trump stands for a fundamental break. With respect to trade, the tycoon-turned-politician plans to repeal key treaties such as the North American Free Trade Agreement and the Trans-Pacific Partnership, plus impose substantial tariffs on Chinese and Mexican imported goods.

He supports a restrictive immigration policy including the deportation of illegal immigrants and the construction of (another) wall along the Mexican border. His ideas about foreign relations are marked by isolationism: Trump basically questions the alliances at the core of US policy since the end of
the second world war, such as the defence agreements with Japan and South Korea as well as the North Atlantic Treaty Organisation. He argues that the US gets too little “bang for the buck”. In addition, his support for Brexit reveals a lack of esteem for European institutions.

Regarding fiscal policy, both candidates argue for higher infrastructure spending. However, Trump’s intention is to dramatically cut both corporate and personal tax rates, which differs radically from Clinton’s tax plans. Trump is also at odds with classic Republican beliefs: His promise to maintain social spending across the Medicare and Medicaid programmes would send the budget deficit and government debt soaring.

In this respect, Clinton is more aligned with her party’s traditional tenets. Her proposal for increasing the taxation of high earners would finance a five-year infrastructure plan for 275 billion US dollars.

Presidential plans regularly unpicked by Congress
Clearly many of Trump’s statements are provocative in nature, probably representing a starting point for action and not a firm commitment. His words, as well as many of Hillary Clinton’s campaign promises, cannot be taken at face value. Moreover, the ambitions of most American presidents including Barack Obama have been cut down to size by a more or less obstructive US Congress.

Therefore, parliamentary elections in the US on 8 November will be nearly as important as the presidential race – a third of the seats in the Senate and all of the seats in the House of Representatives will be up for grabs. While the Democrats may well take the Senate, the larger legislative body will most likely remain in Republican hands. It is worth noting that if elected, Hillary Clinton is more likely to face a divided government than Trump in the event of a victory.

Rough ride ahead for the economy and financial markets?
A Clinton win would give financial markets “more of the same” – no thrills but a high degree of visibility. As can be expected, her policies, with the exception of her stance on the Pacific free-trade agreement, are in line with those of the Obama administration.

Conversely, the effect of a Donald Trump victory on the economy and financial markets is almost impossible to gauge. The scope of his administration’s possible policy actions potentially having a direct and indirect impact on stock prices, US government bonds or the US currency, is just too wide. Yet it is fair to say that the US would probably edge towards “de-globalisation” under Trump, to the chagrin of exporting nations and emerging markets
in particular.

It remains to be seen whether tensions between trading partners could trigger a recession in the US and elsewhere with companies cutting their capital expenditures. All else being equal, the US dollar might benefit from a lower current-account deficit. Moreover, inflation would probably rise on pricier imported goods and immigration restrictions (through rising labour cost).

In a nutshell, the level of uncertainty would rise should Donald Trump emerge victorious, and markets almost certainly won’t like that. As a result, we have lowered our exposure to risky assets further, adopting a broadly neutral stance. While monetary policies remain highly supportive for equity and credit markets, the uncertainties related to the outcome of the US election require a degree of caution.

Comment by Christophe Bernard, Chief Strategist Vontobel