Global policy uncertainty won't go away with the conclusion of the 2016 United States presidential race but it will fall, predicts Deltec's Atul Lele, who says severe levels of uncertainty can cripple economic growth.
Even at moderate levels, when there is little confidence in the direction for policy, the preference for "safe" assets such as bonds means capital is not allocated efficiently. Markets have faced higher levels of policy uncertainty as far back as 2013 when the US debt ceiling had to be negotiated. Uncertainty tends to be bad for shares.
"With the accuracy of polling data prior to the US election and with the potential for even greater uncertainty post-election as the prospect of an even more combative relationship between the president and Congress – and indeed within Congress – both industry and investors are faced with a difficult outlook," Mr Lele says in a new report. That should decline, however, and that has consequences for the assets, which have been boosted by fear and a lack of confidence.
Mr Lele, an Australian who is a former fund manager and equity strategist, is the chief investment officer at Deltec, a Bahamas-based private bank and wealth manager.
"The recent election-related spike in policy uncertainty is not significant in the context of history," he says. On Monday, US equity markets rallied on expectations that Hillary Clinton would defeat Donald Trump after the FBI confirmed it found no new evidence in a probe linked to the Democratic candidate. Australian stocks had their best day in four months and that rally continued on Tuesday; the Australian dollar was on track for a 2016 high, trading above US77¢.
If the uncertainty continues or worsens, Deltec predicts that is good for US treasuries and gold, but "this is largely priced in". It would also cause spreads between treasuries and bunds to widen, and the US dollar to decline in value against the inflationary trend. But were the direction of policy to settle, "safe" assets such as bonds and gold could be at risk of falling in value. That would be good news for shares.
With major elections in Europe over the next few months, it seems likely that the eurozone will become a target of policy uncertainty. That could cause the euro to fall against the US dollar because the growth and comparative stability of America is more favourable. When the Brexit vote shocked markets in June, the British pound declined sharply against the US dollar.
The election should be decided on Wednesday for Australian investors. Other strategists have warned that the currencies of trade-dependent emerging markets economies in Asia are most at risk if Donald Trump is elected president, as well as Mexico's peso.
However, a Clinton victory is not a bullish outcome for global trade, which is becoming increasingly restrictive. Investors would recall that Mrs Clinton's campaign has opposed the massive 2015 trade deal between the US and 11 other economies. One theory speculates that the at-risk Trans-Pacific Partnership could be salvaged during outgoing president Barack Obama's lame duck period. Republican attitudes to Mrs Clinton are so hostile, the party could support the TPP just to spite her, going against the leanings of Mr Trump.
