When billionaire businessman Donald Trump announced a run for the White House just over a year ago, the idea sounded fanciful. Last week, the New York Times poll of polls shows support for Trump at 42.5 per cent against Hillary Clinton’s 42.9 per cent.
The UK markets have already faced a binary event with close polling in the form of the EU referendum, so should we expect similar volatility around the US presidential election?
The political risk is not in the same sphere as the risk from the Brexit vote, says Architas investment director Adrian Lowcock.
“Ultimately whoever wins it doesn’t change anything. They have a new president effectively every four or eight years, so it’s not the same risk as Brexit or the Scottish referendum as they were one-off events,” he says.
While Trump may talk of Mexican walls and 45 per cent trading tariffs with China, political checks and balances will raise a lot of barriers to realising his more extreme ideas.
JP Morgan market strategist Alex Dryden says: “A president doesn’t operate in a vacuum and they are held in check by the house, the senate, the Supreme Court, the international system as a whole. Look at what has happened to Obama in the past four years.”
With minimal policy measures having already been announced by both Clinton and Trump, all eyes will be on the four debates between the two candidates before the election to reveal more of the likely impact on the markets.
Already the pharmaceutical and biotechnology industry has seen the impact of Clinton’s comments on the sector.
“She sent one tweet and the biotech sector went into a tailspin,” says AJ Bell investment director Russ Mould, referring to a comment by Clinton about “price gouging” in the pharmaceutical market being “outrageous”. She had been responding to Turing Pharmaceuticals raising the price of Daraprim, an antiparasitic drug, from $13.50 a tablet to $750 overnight.
However, if Republicans control the senate they are likely to exhibit the same frosty attitude they showed to President Obama’s Affordable Healthcare Act, which was considerably watered down from his original proposals.
While Republicans are traditionally viewed as the more business-friendly party, data going back to 1948 shows on average in the year after a Democrat win there has been a 13.2 per cent rise in the Dow Jones compared with a 1.2 per cent fall for Republican wins. Stockmarket returns on average are 11.4 per cent a year under Democrats against 4.8 per cent for Republicans.
Fidelity Multi Asset Open Growth fund portfolio manager Ayesha Akbar points out oil price shocks have tended to occur under the Republicans. The dotcom bubble also improved the picture for Democrats. Hotels and restaurants could suffer from immigration crackdowns if Trump wins, adds Akbar.
Dryden says the election aside, markets might become more volatile when the US hits its debt ceiling again in March 2017. He says: “People remember the 2010 government shutdown and the subsequent times when we’ve come up against the debt ceiling.
“Things can get quite dicey and that’s when the markets can start to feel it, particularly in fixed income with the threat of potential US default, because politicians can’t negotiate an extension to that debt ceiling.”
However, Lowcock says even though the election will dominate headlines, for investors the focus will continue to be on the Federal Reserve and the path of monetary and fiscal policy. He says:
“The issue with the US is more about policy and possible interest rate rises and the direction of that post election, and less about the wider market,” he adds.
The markets are currently only pricing in a 45 per cent chance of a rate rise by December.
Dryden says: “The Fed has a lot of talking to do to get an interest rate rise back on the agenda for this year.”
Akbar says an increase in infrastructure spending, which has been promised by both candidates, should support the economy. “There probably won’t be as much need for looser monetary policy.”
Reduced immigration could also push up wages and feed into higher inflation. Akbar says a
stronger US dollar would be a headwind for emerging economies, although Russia could be a winner if a Trump presidency meant reduced sanctions.
This side of the pond, most UK investors access the US markets through passive funds, which makes sense, in Mould’s view. He says: “US markets have been incredibly difficult to outperform for US managers.”
He adds that over five years active managers have not outperformed the markets by a large amount.
In the most recent Spot the Dog list of underperforming funds the North America sector accounted for the largest number of underperformers, with the report stating the sector “has long been considered the graveyard for active management”.
Mould says the Fang (Facebook, Amazon, Netflix and Google) stocks have outperformed, and driven much of the market growth, meaning if fund managers “have not been overweight those then they’re in trouble”.
Senior investment manager for Premier Asset Management Simon Evan-Cook says the asset manager’s multi-asset fund has been underweight US equities since its launch in July 2012, holding 5 to 10 per cent compared to global benchmarks of around 55 per cent. He says: “US equities just look very, very expensive. That means they don’t give you a lot of cushion should something go wrong.” Bond proxies are the most expensive, he adds.
Dryden says: “Having that tilt towards value rather than growth in the US gives you a bit of downside protection and still allows you to participate in the rallies because I still see some upside in US equities.”
Lowcock says the lack of active managers in the UK also drives investors to passives. But there are some more interesting ways to play the market, he says. In particular he recommends the Artemis US Extended Alpha funds, which can go long and short. He says: “Because valuations are where they are in the US, on the high side of medium to fair value, having more of a long-short approach is a good way to look at it.”
Lowcock adds there are some good active US income managers that have “phenomenal long-term track records”, although they tend to have lower yields than investors are used to in the UK.
Akbar says while Trump may be unpredictable he is unlikely to be as much of a step into the unknown as Brexit was. “There is an assumption that a Trump presidency would be seen as a risk-off event. That might be the case from a geopolitical perspective, but from an investment perspective that might not be the case. With the US election we should have a lot more clarity and a lot more predictability. The process is there.”