Quick takes on the US elections

6 Nov 2024

The Republican Party achieved a historic victory in this week’s US election, securing a strong mandate to effect change with significant influence across the executive, legislative, and judicial branches of government.

Donald Trump won on a platform advocating lower taxes, deregulation, strict immigration control, a focus on domestic interests over international affairs, and higher trade tariffs. There is considerable uncertainty regarding the sequence and extent of policy implementation. However, the strength of the mandate may narrow the gap between campaign proposals and actual policies.

Few emerging markets are expected to thrive amid increased uncertainty over global trade, US waning support for multilateral institutions, and a deepening fragmentation of the global economy. The cross-border movement of people, capital, goods, and services is likely to face increased friction; this will be coupled with higher US interest rate volatility, as markets digest Trump’s fiscal proposals. Clearly, the near-term post-election environment appears challenging for emerging markets, despite tailwinds related to China’s stimulus and further Federal Reserve rate cuts.

Equities

Even in this complex backdrop, we expect emerging market stocks to deliver mid- to high-single-digit returns driven by earnings growth. North Asian markets, particularly Taiwan, offer appealing upside potential from the artificial intelligence wave. India, with its domestic focus and “geopolitical swing state” status, also presents attractive growth opportunities. We also favor South Africa, benefiting from domestic reform momentum and favorable valuations.

For China, Trump’s victory clouds the near-term outlook. Nonetheless, recent domestic policy signals since late September indicate a strong commitment to stabilizing the economy, providing a cushion for market sentiment. We are monitoring the upcoming National People’s Congress Standing Committee meeting, expected to unveil more detailed support addressing cyclical and structural challenges.

Higher tariffs could negatively impact companies with significant US revenue exposure. Mexico appears especially vulnerable, at least initially. We expect the bilateral relationship to eventually stabilize, as Mexico's role in North American manufacturing is crucial for competitiveness and for keeping US inflation low.

Bonds

Emerging market bond spreads over US Treasuries have been supported by resilient global growth. Emerging market sovereigns are also seeing moderate net positive ratings actions this year, concentrated in countries that have improved their fiscal trends. Sovereigns like Brazil, Costa Rica, Paraguay, Oman, Serbia, Qatar, and Turkey have been upgraded, helping the asset class remain resilient to recent US interest rate volatility.

Emerging market US dollar-denominated bonds—although largely rated as investment grade—offer interest rates of 6.5-7.0%, well above those of US high-yield bonds. We expect emerging market bond spreads to remain stable over the next six to 12 months, allowing investors to achieve high-single-digit returns. Emerging market bonds also provide broad diversification across countries, limiting exposure to those targeted by US tariff policy.

Currencies

Emerging market currencies may remain under pressure in the near term due to upward moves on US Treasury yields and uncertainties surrounding Trump’s tariffs. However, it is unlikely that the US dollar’s gains will be sustained. Unlike in 2016, the Fed is in a cutting cycle, the fiscal deficit is higher, and US dollar valuations are stretched. Thus, we maintain a view of medium-term dollar weakness, which should eventually support emerging market currencies.

The CNY and MXN are particularly exposed to US policy changes. We have raised our USDCNY forecasts for the next year to as much as 7.5 to reflect moderate depreciation. In the short term, the People’s Bank of China (PBoC) is likely to contain currency spikes. However, in the medium term, the risk for the currency will likely be skewed towards depreciation.

In the short term, we think the MXN could depreciate to as much as 21 against the US dollar, given external trade and tariff uncertainty, and domestic reform noise. However, we expect the Mexican peso to eventually recover to around 19.5 by the end of 2025, as we believe the fundamentals of the bilateral relationship with the US will hold.

6 Nov 2024

In recent election cycles, we've seen a consistent pattern in the confidence measures such as the University of Michigan Consumer Sentiment Index: opposition party investors are more pessimistic than incumbent party investors, and this sentiment has shifts significantly when political power changes hands. When your political party is in power, it not only improves your optimism about the economy—it also seems to have an impact on how you evaluate your current financial circumstances.

For example, on the cusp of the 2016 election, Republican consumer sentiment was 27% lower than Democrat sentiment. By the time President Trump was inaugurated, Democrat sentiment fell 24% and Republican sentiment rallied 56%, more than reversing the sentiment gap. The same thing happened in 2020, when Republican sentiment went from 35% higher than Democrat sentiment to 31% lower after the election.

Before the 2024 election, Democrats scored about 70% higher on the University of Michigan Consumer Sentiment Index. If the pattern holds, many Democrats are likely to become significantly more pessimistic in the months ahead, viewing President-elect Trump's victory as a risk to markets and the economy.

There is a risk that many Democrat investors will take this pessimism to heart and reduce their stock allocations. This would be a mistake, in our view, because such politically driven pessimism has often been a costly mistake for investors in past elections.

To demonstrate this, we looked at the impact of this partisan consumer sentiment from 2006 to 2024 in a recent ElectionWatch report. To the extent that investors reduced portfolio risk to reflect their newfound pessimism about the economy after losing past elections, they likely missed out on significant market gains in the early days of the incoming administrations. For example, Democrats would have missed out on about 8% of potential growth during President Trump, while Republicans would have earned about 15% less under President Obama and 13% less under President Biden. In all, we estimate that trading based on the opposition party's consumer sentiment index readings would have underperformed a buy-and-hold investor by about 0.9% per year, or about 61% from September 2006 to October 2024.

Action bias

Events like the US election are often a catalyst for investors to think about making major changes to their portfolio. Such events give us a strong urge to do something— anything—to gain control over the situation. In behavioral finance, this type of anxiety is called “action bias,” and it's a very common trait for investors.

Unfortunately, when it comes to investment adjustments, most decisions are bad decisions unless they reflect a legitimate change to your financial goals or circumstances. In a famous paper called “Trading is Hazardous to Your Wealth,” which studied 66,000 households' brokerage statements between 1991 and 1996, high-turnover portfolios suffered 6.8% annualized underperformance when compared to low-turnover households.¹

This isn't that surprising. Human nature, transaction costs, and tax costs are all working against us whenever we trade. Even when higher turnover does lead to higher returns, it also results in higher taxes and transaction costs—so you would expect higher turnover investors to have lower net returns, on average. With this in mind, the default should usually be to leave the portfolio on autopilot.

On the other hand, complete inaction isn't usually a good idea, either. Fortunately, many valuable portfolio management strategies—like rebalancing and tax-loss harvesting —can add value in most market environments with a high likelihood of outperformance. For example, unless you have rebalanced recently, it's likely that your stock allocation has “drifted” above your long-term asset allocation target at the expense of a smaller-than-target bond allocation. Moreover, there may be opportunities to implement a tax-loss swap in your bond holdings, given bonds' recent losses. These strategies may help to scratch the “itch” to take action.

If you do decide to make a portfolio or risk profile change, it can be helpful to write down your reasoning. As a general rule, it's okay to make adjustments to reflect new spending or retirement goals, or a fundamental change to the long-term outlook for markets—but don't just do it to feel more comfortable. Short-term comfort often leads to long-term regret.

Here are a few approaches to help you dispel action bias:

1. Focus on what you can control. There is a lot of wisdom in the Serenity Prayer, which asks for “the serenity to accept the things we cannot change, the courage to change the things we can, and the wisdom to know the difference.” Investing requires us to accept short-term volatility in exchange for long-term growth potential; even so, we do have tools to improve the risk-return dynamic—for example, building a well-balanced, diversified portfolio.
2. Automate good action. Talk to your advisor about setting portfolio management plans—like rebalancing if your portfolio goes more than 5% from your equity allocation target, or automatically harvesting tax losses—to gain the benefits without adding to the number of active decisions you need to make. Many portfolio management strategies work best when they are automated, or implemented by a professional, because they require small, frequent changes that are often counterintuitive and uncomfortable.
3. “Quarantine” bad action. The word quarantine comes from quarantina, an Italian word for the 40-day period that ships would need to be isolated during the Black Death plague. When you decide to make a big change to your long-term strategy or plan, give yourself some time to reconsider—maybe not 40 days, but at least a week.
4. Focus on your goals. We recommend using the UBS Wealth Way approach to design a portfolio that reflects your goals and your values. A purpose-based approach to investing can put risks and changes into context, helping you to think objectively about they may impact your probability of meeting your goals. When planning for the future, it's often helpful to envision your future self, and try to do your best for them. Invest for growth to help “future you” retire on time, pay for family vacations, and give back to the community. Having empathy for your future self can often help you to look past short-term uncertainties and tackle what may be the biggest investment risk of all: the opportunity cost of missing out on growth potential by investing too conservatively with long-term investment assets.
5. Manage risk. Regardless of whether you are worried about politics, geopolitics, or something else, the bad news is that there is always a risk that we will experience market volatility, or even a bear market. The good news is that most investment portfolios have fully recovered their losses—even after the largest disruptions in history—within three to five years. Therefore, the best way to protect yourself against market risk is to build a Liquidity strategy that can fund your spending for three to five years, thus allowing you to maintain your lifestyle even if there is a recession or a market drawdown. See www.ubs.com/bearmarketguidebook for more research and strategies for managing risks.

UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Financial Services Inc. and our Financial Advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different time frames. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment.

¹Brad M. Barber, Terrance Odean, “Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,”
The Journal of Finance, Vol. LV, no. 2. April 2000

6 Nov 2024

The conclusive result of the US presidential election removes one key uncertainty for Europe’s leaders and companies, but it also ushers in a range of new ones. In terms of policies, President-elect Trump campaigned on a platform of lower taxes, deregulation, a tougher stance on immigration, and trade tariffs. Of these, the most consequential for the European economy is the potential for trade tariffs. US policy toward the war in Ukraine will also be in focus in the coming months, but beyond the already known fact that European defense spending will have to increase to NATO commitments (2% of GDP) in the coming years, it is too early to draw definitive conclusions.

The US is the single largest trading partner (measured on a value-added basis) for the EU, accounting for around 15% of exports, and around 18% for the UK (although the combined EU is larger). Thus, any pursuit of universal trade tariffs from the new US administration could have a noticeable and direct impact on demand for European exports. The extent of this is hard to gauge, as it is yet unknown whether President-elect Trump will pursue tariffs on European exports and, if he does, at what level after what is likely to be long and difficult negotiations that could result in short-term retaliatory measures.

It isn’t just direct trade. China is likely to be the initial target of trade policies from the new administration, potentially with much higher tariffs. This could result in weaker demand overall from China, which could, in turn, harm demand for European exports to the country. China accounts for around 10% of EU exports and 5% of the UK’s. Any fiscal policy response from China to counter US actions could limit the impact.

But a potential loss of consumer and corporate confidence if trade tariffs are pursued could have an even bigger impact on the economy. Weaker household demand and lower corporate investment in the short term are arguably just as big a challenge to European economies as tariffs. Overall, it seems the downside risks to our already modest expectations of around 1% growth for the Eurozone and around 1.5% for the UK in 2025 are increasing.

As for inflation, weaker growth could add to the disinflationary trends already under way. Moreover, a policy response from China that results in boosting production and the supply of goods to economies outside of the US could compound disinflationary pressure.

The implication for central banks is that the risks of further interest rate cuts beyond our base case are increasing. We currently expect the European Central Bank (ECB) to take interest rates back to the 2% neutral level as soon as June 2025. For the Bank of England, we look for a more modest cutting pace as growth is more robust and the UK government has announced large fiscal easing. However, risks to a faster pace of cuts in 2H25 are rising.

Turning to equity markets, with around a quarter of European profits generated in the US, any escalation in trade tensions could have a negative impact on earnings. However, these sales to the US include services that would not be subject to tariffs, and most goods sold in the US are produced locally rather than exported. Therefore, the proportion of genuine exports to the US from Europe is much lower than that. We see the bigger risk from the impact on global trade from both the threat of universal tariffs and potentially much higher tariffs on goods from China specifically. In 2018-19, European equities on average fell 7% during the three episodes of US-China trade escalation, with China-exposed cyclical sectors, such as materials and consumer discretionary, falling by more than 10% on average. We therefore view a potential trade escalation as a negative risk for European equities.

6 Nov 2024

Introduction

Mr. Donald Trump will be the 47th President of the United States, with the Associated Press calling the 2024 election in his favor. The former president has secured the needed 270 Electoral College votes to become only the second person in American history to be re-elected to non-consecutive terms.

Votes are still being counted, but the Associated Press has projected Republicans will regain majority control of the Senate with at least 51 seats. The GOP picked up seats in West Virginia and Ohio; protected against challenges in Nebraska, Texas and Florida; and is projected to win in Montana. Meanwhile, tight races in the House of Representatives will mean the overall composition of Congress may not be settled for a few more days or weeks. It is possible that close results in individual states may lead to recounts. That said, we believe it is unlikely that recounts will alter the apparent result of the election, and we believe that investors should make forward-looking investment decisions on the assumption of a Trump victory.

For now, we stay Neutral on China and prefer Asia ex-Japan equities. At the time of writing, the Hang Seng index and its tech subindex are trading down close to 3% each, while the Chinese yuan has weakened (USDCNY +0.8%). Markets are now closely watching the response from China’s National People’s Congress (NPC) Standing Committee meeting, which concludes on 8 November.

In our view, while there is now more clarity on the US election outcome, a different type of uncertainty could persist past Election Day if volatility grows, and if hawkish policies emerge in tariff, trade, and tech restrictions. We bring you a special Investing in Asia Pacific report with our quick take on the likely impact on Asian assets, and how to prepare.

China

Macro: Trump has indicated he may impose up to 60% tariffs on all Chinese imports, though our primary outlook assumes a more measured approach. It is unlikely that these tariffs will be applied universally, immediately, and at the maximum rate. Instead, the actual tariff strategy will likely be phased and adjusted to align with what is feasible over time.

Investors are now likely to focus on the 14th National People’s Congress (NPC) Standing Committee meeting, which concludes on 8 November, for any shifts in response to Trump’s projected victory. We think Beijing’s upcoming stimulus package could be sizable, as hinted by China’s Finance Minister in October.

Overall, we anticipate an overall stimulus package of up to CNY 30 to 50 trillion in the coming 5-10 years. This would primarily involve local government debt resolution (about CNY 15tr in 2025 to 2028), property inventory destocking (about CNY 7tr), and social welfare support (about CNY 1-2tr annually). An initial package of CNY 2-4tr could be announced for these areas by year-end.

However, with Trump’s projected win, we expect China to accelerate its planned stimulus more aggressively in the initial years. The size could be up to CNY 8-10tr for 2025, depending on the actual tariffs’ sequence and scale. Under a red sweep, the stimulus size could be closer to the high end of the range; under a split Congress, the size could be closer to the low end. Finally, the stimulus should aim to keep GDP growth at around 5%.

Equities: We keep our Neutral view on Chinese equities for now. Trump’s projected victory challenges the near-term outlook for Chinese stocks, even though the revenue exposure of MSCI China to the US is less than 5%.

But the risks here are well known. The short-term downside risks for the overall market would likely be led by export-reliant growth sectors, including consumer, IT, and internet names viewed as market proxies. Notably, if such risks materialize, we would consider adding more weight to the internet sector if it drops significantly from the current level. Amid potential volatility spikes, value sectors with high dividend yields (e.g., financials, utilities, energy, and telecoms) should stay resilient. If the market falls sharply and if the eventual policy response from the NPC Standing Committee meeting is constructive, we would consider a more positive view. We expect more volatility ahead while the market awaits concrete tariff announcements from a Trump administration, which would likely take place in mid-2025.

Asia

Macro: Under a Trump administration, we see Asian growth buffeted by short-term tariff-induced headwinds into 2H25. Smaller open economies are likely to be hit more than domestic-driven ones (e.g., India, Indonesia, the Philippines). But in the lead-up to the tariff imposition, growth could accelerate temporarily due to a period of export front-loading as US importers seek to stock up in advance of trade restrictions alongside stronger consumption. However, as tariffs are imposed, regional exports would face a step down; the degree depends on the tariff structure and timing. Another trend to watch is a potential acceleration in regional trade as corporate investments (manufacturing and construction) ramp up to expand regional supply-chain capacity.

But the key reason why we do not expect more than a 1% GDP slowdown (i.e., a more extended trade disruption) is that unlike 2018-19, Asia and the US are easing policy, not tightening. Also, we see a more durable outlook for US growth, not a steep slowdown. These factors—plus China’s stimulus and race to upgrade its industries—are substantial cushions to Trump’s proposed tariffs. Regional policy interest rates should continue to be lowered by around half the amount in the US, supporting domestic growth.

Equities: We retain our Attractive view on Asia ex-Japan equities. The asset class benefits indirectly from mainland China’s stimulus. Moreover, the Fed easing cycle, South Korea and Taiwan’s structural AI growth story, and resilient growth from domestic-oriented markets (India and Southeast Asia) could still see double-digit earnings growth for the region in 2025. Indeed, the price action today reflects this, with India and Taiwan equities as early outperformers.

India’s Nifty 50 is up more than 1%, as the country is less exposed to trade risk. Additionally, after the recent pullback, we believe current levels offer an attractive entry opportunity to own a structural story. Similarly, Taiwan equities are up 0.5% today, as the rally in the Nasdaq 100 Futures index reflects investor appetite for structural AI trades in Asia.

Conversely, we remain Neutral on Japanese equities. In Japan, the Nikkei 225 rallied 2.1% today, negating concerns about the impact of potential Trump tariffs. While the rally appears to be driven by yen weakness, we think profit growth for Japanese equities is likely to slow, capping further upside. We acknowledge that fiscal measures by the Chinese government would positively impact Japanese equities if China's EPS grows, given that China accounts for a high single-digit percentage of Japanese companies' sales. However, the timing of any significant tariff increase on Chinese imports announced by Trump could lead to a negative share price reaction. When Trump first mentioned tariffs on Chinese goods in early 2018, the TOPIX had a muted reaction, but as trade tensions worsened, the TOPIX declined by over 10% in 4Q18. That said, in 2018, there were no supportive measures from the Chinese government.

Bonds

Asia IG and HY: We think investors should continue to position in Asia investment grade (IG) bonds. With the jump in rates, Asia IG yields look attractive (at 5.4%) and are a good avenue to lock in stable carry, in our view. We expect healthy total returns in the next 12 months, given a robust fundamental and demand/supply backdrop. We also see limited IG spread widening even if protectionist US policies materialize. Most USD bond issuers in Asia are domestically focused, hence any fundamental impact should be muted.

Within China IG, we see minimal impact on state-owned enterprises (SOEs) and financials. The chemical, semiconductor, hardware, and consumer technology sectors could see some impact from protectionist measures. However, with their broadly sound fundamentals, any weakness could be a buying opportunity. Moreover, overall China IG technicals are now much stronger than in Trump’s last term, due to negative net issuance from Chinese issuers for over two years. This has reduced the index weights for China in both IG and high yield (HY) indices. For example, China’s weight in the index has dropped from over 50% in 2018 to 34% presently. We think this could fall to around a quarter of the IG index by 2026 and could support spreads in the next six months.

Asia HY’s reaction could also be limited, in our view. We see very little fundamental impact for Asian HY issuers from potential Trump policies. Stimulus measures from China’s NPC meeting and the effective implementation are more important drivers for mainland China HY. We continue to prefer bottom-up opportunities in Macau gaming and commodity names.

Asia local currency bonds: We see reduced upside for the asset class with Trump’s projected win. While we still expect positive returns in the next 12 months from yield carry, rates compression may be more limited given that Asia central banks could be more constrained in their rate cuts. Even though inflationary pressures in Asia are low, Asian FX could face added risks if Trump enacts protectionist policies.

Chinese government bonds: The asset class remains unappealing to us, as the yield carry remains low, and FX returns from CNY could see further downside given Trump’s projected victory. Should China surprise with a big fiscal package, this could also cause some upward pressure on long end bond yields. Overall, we see a negative to low-single-digit total return for the asset class in the next 12 months.

Currencies

USDCNY: The USDCNY has risen to 7.17 (from 7.10) at the time of writing. We see further upside and have adjusted our forecasts to 7.3 (Dec 24), 7.4 (Mar 25), 7.5 (Jun 25), 7.5 (Sep 25), from 7.2, 7.0, 7.0, 7.0 previously.

In the coming months, the People’s Bank of China (PBoC) is likely to contain the spike in the USDCNY by keeping the USDCNY official fixing relatively stable. That said, the USDCNY fixing rate might not be completely unchanged, especially if we see broad USD strength.

Over the medium term, the risk for the USDCNY will likely be skewed toward the upside. History shows that during the 2018-2019 trade war, the USDCNY rose in a step-fashion as the US imposed tariffs on China's goods in a staggered manner. While the PBoC could contain the rise at around 7.5, we would refrain from seeing this level as a hard “line in the sand”.

USDJPY: The USDJPY has risen from 151.5 to around 154 at the time of writing, tracking the rise in US bond yields. Based on sensitivity analysis over the past three years, a 10bp widening of the US-Japan 10-year yield differential coincides with a one-yen rise in the USDJPY exchange rate. In this context, a near-term spike in 10-year US yields toward 4.8% could see the USDJPY test the 158 level.

We believe a USDJPY spike toward 158-160 levels is unsustainable and see such levels as opportunities to tactically sell USDJPY or sell the upside price risk for yield pickup. Over the medium term, we still expect the USDJPY to fall back below 150, as the Fed cuts rates and the Bank of Japan pursues further policy normalization over the course of 2025.

AUDUSD: The AUDUSD fell on the back of Trump's projected victory, with risks of higher China trade tariffs a key downside risk to the pair over the months ahead. Conversely, we await stimulus details from the China’s NPC meeting, with greater stimulus supportive for the AUD and commodity prices. While we see modest downside risks to the 2025 forecasts for AUDUSD if US-China tensions rise, we believe the recent sell-off already factors in these recent events to some degree.

Moreover, there is a risk that the Reserve Bank of Australia could be on hold for longer due to domestic factors, which is supportive of the AUDUSD around the high 60s. While we would avoid outright long positions until greater clarity emerges on China and the composition of the US Congress, we continue to recommend using the higher volatility to sell downside in the pair at 0.63 or below.

USDSGD: The USDSGD rose by around 1% from 1.317 to 1.331, against a backdrop of broad USD strength. In the near term, a rise toward 1.35 is possible if major currencies such as the CNY, JPY, and EUR weaken further. On a medium-term fundamental perspective, more protectionist trade policy under a Trump administration would also be unwelcome for the SGD, given Singapore's dependence on global trade.

But notwithstanding near-term USDSGD upside risk, we regard levels above 1.35 as attractive to tactically sell USDSGD or sell the upside price risk for yield pickup. We believe the USDSGD has room to decline over the medium term for several reasons: (1) The Fed should continue to cut rates in 2025, which steadily erodes the USD’s yield appeal; (2) During the trade war between June 2018 and September 2019, the SGD weakened by a moderate 3% versus the USD, even as the CNY came under heavy depreciation pressure; (3) We expect the Monetary Authority of Singapore to retain its policy of gradual currency appreciation, which should support the SGD.

Commodities

Gold: Gold prices ticked lower following the sharp USD rally, and US rates stepped higher. While the reaction is surprising, markets could be assuming that campaign rhetoric will not fully translate into policy. Historically, gold tended to rise ahead of the election of a Republican president and remain relatively flat in the post-election period. However, this time, with ongoing geopolitical uncertainties including trade-related risks, potentially higher US inflation, and expectations for continued central bank buying, we reiterate our view that gold remains a hedge within a portfolio context. We maintain our USD 2,900/oz target for September 2025 and recommend an around 5% allocation to gold in a USD-based balanced portfolio.

Oil: The USD rally and a belief that Trump would usher in higher US oil production has had a negative impact on oil prices so far. In our view, the market remains too focused on the impact of potential tariffs, its negative read-through to economic growth, and the impact on oil demand. But as before, Trump could tighten sanctions on key oil producers, like Iran and Venezuela, which would be price supportive. As such, we retain our moderately constructive outlook for oil prices for now. We highlight that OPEC+ retains its cautious outlook and supply discipline, while ongoing monetary and fiscal stimulus measures in China and the US could shore up demand.

6 Nov 2024

What’s happened?

Donald Trump will be the 47th President of the United States, with the Associated Press calling the 2024 election in his favor. The former president has secured the needed 270 Electoral College votes to become only the second person in American history to be re-elected to non-consecutive terms.

Votes are still being counted, but the Associated Press has projected Republicans will regain majority control of the Senate with at least 51 seats. The GOP picked up seats in West Virginia and Ohio; protected against challenges in Nebraska, Texas and Florida; and is projected to win in Montana. Meanwhile, tight races in the House of Representatives will mean the overall composition of Congress may not be settled for a few more days or weeks.

It is possible that close results in individual states may lead to recounts. That said, we believe it is unlikely that recounts will alter the apparent result of the election, and we believe that investors should make forward-looking investment decisions on the assumption of a Trump victory.

At the time of writing, S&P 500 futures are up by 2.3% and Russell 2000 small-cap index futures are up by around 6%, likely on anticipation of stronger domestic growth, increased M&A activity, an extension to personal tax cuts, and hopes of lower corporate taxes. The prospect of a clear-cut election outcome may also be driving futures higher, given reduced uncertainty about the future.

Ten-year US Treasury yields have risen around 18 basis points to 4.44% at the time of writing, in anticipation of higher nominal GDP growth and higher fiscal deficits. The US dollar has strengthened by 1.7% against the euro. Gold is down around 0.7%, at the time of writing.

With a possible increase in trade tariffs under a Trump presidency, the Hang Seng index fell 2.2% and the Chinese yuan has weakened (USDCNY +0.4%). Elsewhere in Asia, Japan's Nikkei 225 index rose 2.6% amid a 1.5% decline in the yen. The Euro Stoxx 50 is up 0.9%. The Mexican peso is trading down by 3% against the US dollar.

What will it mean for policy, the economy, and geopolitics?

Trump campaigned on a platform of extending personal income tax cuts, lower corporate taxes, deregulation, trade tariffs, immigration controls, and re-assessing America’s role in global affairs. If the Republicans secure control of Congress, the president would have greater scope to pursue his policy agenda. That said, narrow Congressional majorities could constrain some policy measures, especially given already large federal budget deficits.

We believe that tariffs are the most potentially consequential policy from an economic perspective. The mooted 60% tariff on imports from China and a 10% tariff on imports from the rest of the world could make much of US-China trade unviable, reduce US domestic demand and corporate profits, and lead to lower GDP growth around the world, particularly in China. Such tariffs could also contribute to higher inflation in the US.

Of course, it remains to be seen whether negotiations, concessions on trade or other issues, or legal challenges may ultimately lead to lower (or no) tariffs being introduced in the end. It should also be noted that it is also likely to take time to introduce tariffs, which we think would likely take until the second half of 2025 or 2026 to implement.

In fiscal policy, we think the election result reduces near-term fiscal risks around funding the government (20 December 2024 deadline) and the expiration of the debt limit suspension (2 January 2025 deadline). Trump campaigned on extending the expiring personal tax cuts at the end of 2025, reducing the corporate tax rate from 21% to 15%, and a range of other tax exemptions on earned income. With the deficit as a share of GDP now twice as large as at the start of Trump’s first term, and as interest rates are higher, fiscal hawks in Congress could opt to block or scale back legislation that would further expand the deficit, especially if Congressional majorities are slim.

We expect the Fed to continue to move toward a neutral policy stance, and we do not expect it to immediately change its outlook given high uncertainty around policy executionremains high. An additional 25bp rate cut on 7 November looks highly likely, and in our base case, we expect another 25bps cut in December and 100bps of easing in 2025. At the margin, the Fed may slow the pace of rate cuts if it perceives that changes to migration, trade, or fiscal policy may lead it to fear higher inflation.

Elsewhere, we expect measures supporting a swift deregulation of the fossil-fuel energy and financial services industries. From a geopolitical perspective, we think that a Trump presidency is likely to mean a more confrontational stance with China, test transatlantic relations with respect to both trade and the war in Ukraine, and see the application of a “maximum pressure” strategy toward Iran, keeping the risk of escalation in the Middle East at a high level.

What will it mean for markets?

Equities

US: US equity futures have traded up while election results have been tallied. In our base case, we expect the S&P 500 to rise to 6,600 by the end of 2025, a near-15% price return from current levels, driven by our expectations of benign US growth, lower interest rates, and the continued structural tailwind from AI. Lower corporate taxes and/or deregulation of the energy and financial sectors under a Trump administration could provide additional support.

Technology, utilities, and financials are among the equity sectors we see as Attractive. In technology, Trump’s win could lead to heightened fears about the impact of tariffs on earnings for hardware and semiconductor companies. But we do not believe this will outweigh the structural growth story over the medium term. AI infrastructure spending remains robust as businesses experiment with AI use cases and companies race to stake out leading positions. We expect semiconductor components needed for AI will likely remain supply-constrained into next year, supporting pricing.

In utilities, renewables-leveraged companies could face headwinds following Trump’s victory. However, we still expect renewables demand to remain strong as corporates, states, and municipalities focus on decarbonization goals. More fundamentally, we expect significant growth in AI data centers to drive strong growth in power demand and rising power prices. In addition, we think the sector's defensive characteristics should offer ballast in a portfolio should economic growth concerns arise.

For the US financial sector, we think Trump’s victory is likely to be seen as an immediate positive, as it could presage deregulation. In addition, we believe the medium-term outlook is positive, supported by a robust economy and a potential pickup in activity in areas such as business lending and M&A due to Fed rate cuts.

China: The Hang Seng index traded 2.2% lower and the Chinese yuan has weakened.

A Trump victory raises the probability of very large tariffs on Chinese exports to the US and challenges the outlook for Chinese stocks. At the same time, Chinese stocks are already inexpensive, and markets will be watching the outcome of the National People’s Congress (NPC) Standing Committee meeting on Friday to see if Beijing may increase and front-load stimulus spending in response. We keep a Neutral stance on Chinese equities for now.

Europe: 

The potential for tariffs is also a concern for European companies, though the Euro Stoxx 50 index is trading 0.9% higher at the time of writing. Around a quarter of European listed companies’ sales are to the US. But we note that only a small portion of these sales are actual exports: Most goods sold by European companies in the US are produced in the US. European cyclicals exposed to China face more significant risks, in our view. Such stocks sold off by an average of around 10% in previous episodes of the US-China trade war in 2018-19. The potential rollback of some of US green energy initiatives may also weigh on parts of the European industrials and utilities sectors.

Bonds

Ten-year US Treasury yields have risen around 18bps to 4.44% in anticipation of higher nominal GDP growth and higher fiscal deficits. After the recent sharp increase in yields, we think that yields are higher than warranted, see positive returns for bonds ahead, and believe that investors with high cash balances should use currently elevated yields to lock in yields for the year ahead.

The market appears to be taking a strong view on the potential inflationary impact of Trump’s policy agenda, when there is still considerable uncertainty over the extent to which it can be implemented or its actual effect on inflation. Bonds are also attractive from a portfolio perspective, with potential for significant upside in a risk case of the US entering a recession.

Currencies

The Dollar Index (DXY) has strengthened by 1.2% in recent hours. Markets appear to be focusing on the potential for lower taxes, higher nominal growth, and tariffs, which could all provide tailwinds for the dollar.

In the near term, the dollar could remain strong as markets price a Trump victory. But over the medium term, we still expect the dollar to depreciate over the coming year. Fundamentally, we believe that a combination of the dollar’s overvaluation and the US’s significant twin fiscal and current account deficits are likely to weigh on the currency. Investors should consider using current dollar strength to diversify into other G10 currencies.

The Mexican peso has depreciated significantly on fears of trade restrictions, and the Chinese yuan is down by 0.4% against the US dollar at the time of writing. We expect USDCNY to trade toward 7.4 under a Trump administration.

Gold: Gold has fallen 0.7% in recent hours to around USD 2,725/oz at the time of writing. Looking ahead, we believe that higher deficits, geopolitical uncertainty, and continued central bank buying should lead to upside over the coming months. We have a USD 2,900/oz target for September 2025.

5 Nov 2024

At the time of writing, prediction markets are pricing an increased chance of former President Trump securing the presidency and Republicans taking control of both houses of Congress, with Polymarket pricing a 94% chance of a Trump presidency (Predictit 91%) and an 73% chance of a red sweep.

S&P 500 futures are up by more than 1% and the Russell 2000 small cap index up by around 3%, likely on anticipation of stronger domestic growth, increased M&A activity, and an extension to personal tax cuts. Trump has also campaigned for lower corporate taxes. The prospect of a clear-cut election outcome may also be driving futures higher, given reduced uncertainty about the future.

US 10-year Treasury yields have risen 14 basis points, in anticipation of higher nominal GDP growth and higher fiscal deficits. The US dollar has strengthened by 1.6% against the euro. Gold is trading close to flat.

With a possible increase in trade tariffs under a Trump presidency, the Hang Seng index and its tech subindex are trading down close to 3% each, while the Chinese yuan has weakened (USDCNY +0.7%). Elsewhere in Asia, Japanese equities are up 2.2% amid a 1.4% decline in the yen, while Taiwanese equities have risen 1%. The Mexican peso is trading down by 3% against the US dollar.

Over the coming hours, investors will be closely watching for projections in key swing states. As we publish this, the Associated Press has projected Trump will win North Carolina, with the remaining six battleground states Pennsylvania, Michigan, Wisconsin, Nevada, Arizona, and Georgia not yet called.

A full result in Congress is unlikely to be known for days. That said, it appears highly likely that Republicans will secure control of the Senate by picking up a seat in West Virginia and leads in Ohio and Montana. A voter swing toward the Republicans would likely also mean a high chance that the Republicans secure the House.

What are the implications for investors?

As markets digest the state-by-state tallies, we anticipate significant cross-asset volatility in the hours ahead. We reiterate our view that investors should be prepared to use any outsized market reactions to build stronger long-term portfolios, focusing on opportunities in equities, bonds, and gold. We also think investors should consider diversifying US dollar holdings.

We think US equities are attractive and should be supported by benign growth, lower rates, and structural support from AI, regardless of the election result. Lower corporate taxes and deregulation of the financial and energy sectors could provide an additional tailwind under another Trump term, though the potential impact of tariffs could create a headwind for trade-sensitive sectors.

A Trump victory would raise the probability of very large tariffs on Chinese exports to the US and challenges the outlook for Chinese stocks. In that regard, a negative initial reaction would be justified. At the same time, we note that Chinese stocks are already inexpensive, and it is possible that Beijing may front-load stimulus spending more aggressively in response. Key announcements are expected from the 14th National People’s Congress (NPC) Standing Committee meeting, which concludes on 8 November.

In fixed income, bond yields have risen substantially in recent weeks and even further in the past few hours. We believe that currently elevated yields offer a chance to lock in attractive rates and improve portfolio diversification, and we expect lower interest rates ahead regardless of the election victor.

In currencies, although the dollar has strengthened in anticipation of a Trump victory and could strengthen further in the near-term in a Trump scenario, we anticipate medium-term dollar depreciation regardless of the victor and suggest that investors consider using periods of strength to diversify dollar exposure toward other G10 currencies.

Finally, gold prices remain flat despite a rally in the USD and higher US rates. However, we maintain our view that it is valuable hedge against geopolitical and economic uncertainties, and we expect further upside over six and 12 months in either a Trump or Harris scenario.

4 Nov 2024

We believe that US equities are attractive, and should be supported by benign growth, lower rates, and structural support from AI, regardless of the election result. Investors should be prepared to capitalize on market dips to build long-term positions, particularly in the technology, utilities, and financials sectors.

We see a potential opportunity emerging in China equities: A Harris victory would allow investors to focus on an improving fundamental picture, while any substantial market correction under a Trump victory could present a buying opportunity.

In fixed income, bond yields have risen substantially in recent weeks; we believe that currently elevated yields offer a chance to lock in attractive rates and improve portfolio diversification, with lower interest rates ahead regardless of the election victor.

In currencies, although the dollar could strengthen in the near term in the event of a Trump victory, we anticipate medium-term dollar depreciation regardless of the victor and suggest that investors consider using periods of strength to diversify dollar exposure toward other G10 currencies.

Finally, we believe that gold remains a valuable hedge against geopolitical and economic uncertainties, and we expect further upside in both Trump and Harris scenarios. While a Trump victory might accelerate gold's rise, a Harris victory would likely see a steadier climb.

More to go in US equities, regardless of the victor

While some equity market volatility this week is inevitable, we do not expect the likeliest election outcomes to change our 12-month view on US equities. We expect the S&P500 to rise to 6,600 by the end of 2025, a c.15% price return from current levels, driven by our expectations of benign US growth, lower interest rates, and the continued structural tailwind from AI. We expect these market drivers to remain in place regardless of who wins the US election.

At a sector level, our preferences include technology, utilities, and financials.

In technology, a Trump win could have a slight negative impact in the near term, as markets may fear the impact of tariffs on earnings for hardware and semiconductor companies. But we do not believe this should outweigh the structural growth story over the medium term. AI infrastructure spending remains robust as businesses experiment with AI use cases and companies race to stake out leading positions. We expect semiconductor components needed for AI will likely remain supply-constrained into next year, supporting pricing. A Harris victory would largely be a status quo outcome that shouldn’t significantly change investor expectations.

Parts of utilities could experience a bit of a relief rally in a Harris win as ongoing government support for renewables would be more assured. Conversely, renewables-leveraged companies could face some pressure in a Trump victory. However, even in this scenario, renewables demand likely would remain strong as corporates, states, and municipalities focus on decarbonization goals. More fundamentally, we expect significant growth in AI data centers which will likely drive strong growth in power demand and rising power prices. In addition, we think that the sector's defensive characteristics should offer ballast in a portfolio in the event economic growth concerns arise.

US financials could face short-term headwinds under a Harris victory, as investors price out any deregulation benefits from a Trump win. Still, we think the medium-term outlook would remain positive, supported by a robust economy, and a potential pickup in activity in areas such as business lending and M&A due to Fed rate cuts. A Trump victory could presage deregulation and would likely be an immediate positive for the sector.

Higher bond yields present a chance to prepare for lower rates

In recent weeks, a combination of stronger US economic growth data and market anticipation of a potential Trump victory has led to higher bond yields across the curve. We now believe that yields are too high, regardless of who secures the presidency.

Our 10-year yield forecast is 3.5% for June 2025. While we would expect yields to land somewhat higher than 3.5% under a Trump presidency, we would still anticipate positive returns for bonds over the coming twelve months. We do not expect the election result to shift the Fed from a path toward lower interest rates, and inflation remains on a downward trajectory.

We have been advocating that investors "prepare for lower interest rates" by deploying cash into medium-duration fixed income. Today’s elevated bond yields provide investors with an opportunity to do that, and deploy cash to lock in yields while attaining a strong portfolio diversifier.

Potential opportunities arising in China

We expect the US election outcome to lead to significant short-term volatility in China equities. While both candidates are likely to be "tough on China," fears about the potential 60% tariff on Chinese imports to the US proposed by Trump could be particularly impactful. However, short-term volatility could give rise to an opportunity for longer-term investors.

A Trump victory would be a negative for the earnings of Chinese companies. But risks are well-known. China equities are already inexpensive. A Trump victory could see Beijing front-load stimulus spending more aggressively. And US-China trade already fell meaningfully during Trump’s first term, with MSCI China’s revenue exposure to the US now below 5%. Additionally, we do not expect a 60% tariff to ultimately be implemented in our base case. In our view, Trump is likelier to negotiate with Beijing, with eventual tariffs being more targeted in scope.

As such, if Chinese markets were to fall by 10% or more in case of a Trump victory, we would view this as pricing sufficient near-term downside risks to consider recommending adding to China equity positions

Meanwhile, we believe that a Harris victory would remove an important overhang from China equities and allow investors to focus on low valuations, the potential for additional stimulus, and strong earnings growth. Provided the market does not rally by more than 10%, all else equal we would consider China equities as attractive in the event of a Harris victory.

From a currency perspective, a Trump victory would likely see the Chinese yuan depreciate, while a Harris victory would likely see it appreciate. USDCNY currently trades around 7.1. We see it trading towards 7.4 after a Trump victory, or towards 6.8 after a Harris victory.

Sizing the downside for the dollar

We have a negative view over the medium term on the US dollar, forecasting EURUSD to rise to 1.16 by September 2025. Fundamentally we believe a combination of the dollar’s overvaluation, a shrinking yield advantage over other currencies, and the US’ significant twin fiscal and current account deficits is likely to weigh on the currency regardless of the victor.

We would expect the dollar to be somewhat stronger under Trump than Harris. More pro-growth policies, likely higher interest rates, and tariffs could all provide tailwinds for the dollar. Nonetheless, from today’s level’s we would expect dollar depreciation regardless of the victor.

Investors should therefore prepare to use periods of dollar strength that may emerge after the election to diversify or hedge currency exposure and mitigate the risk of dollar depreciation on portfolios.

Gold: upside, fast or slow

Gold prices have rallied sharply this year, and from today’s levels we expect further upside for gold regardless of who wins the White House, though the election result could affect how quickly we reach our USD 2900/oz target for September 2025.

In case of a Trump victory, we would expect gold prices to rally sharply in response, as markets price potentially higher rates of inflation and geopolitical uncertainty.

In case of a Harris victory, we would expect the reaction in the gold market to be more muted initially. But we would expect gold to regain its footing thereafter, as markets refocus on the dollar and interest rate outlook, as well as still-robust investor and central bank demand.

As we approach the U.S. election, it's crucial for investors to remain focused on their long-term strategies. While the election outcome may introduce volatility, it should be seen as an opportunity to strengthen portfolios for the longer term.

21 Oct 2024

US equities are sitting at record-high levels as markets enter the final two weeks before the US presidential election. The S&P 500 closed at its 47th all-time high this year on Friday, after making gains for six consecutive weeks, the longest winning streak this year.

As neither party holds a clear advantage in any of the key swing states that could decide the outcome, the race remains too close to call, and we expect volatility to pick up in the coming weeks amid elevated uncertainty. But we also think the potential volatility is unlikely to derail positive equity fundamentals, and remind investors not to make dramatic portfolio changes based on expected election outcomes.

The election is taking place against a backdrop of healthy earnings growth and solid economic momentum. Companies that represent about 15% of the S&P 500 market capitalization have reported their third-quarter results so far, with nearly 80% of them beating earnings estimates and more than 60% beating sales estimates. Bank management teams are optimistic about the broader economy and confident in capital markets activity, while consumer spending remains steady. There are also signs that point to the sustainability of artificial intelligence (AI) demand. With the Federal Reserve likely to cut interest rates further amid a resilient economy, we continue to forecast S&P 500 earnings to grow 11% this year and 8% in 2025. Reducing equity exposure in the wake of a “disappointing” election outcome is likely to be counterproductive over the longer term, in our view—data going back to 1928 show that US equities tend to rise into US presidential elections and thereafter.

The potential policy implications for the equity market will need to be viewed in the context of actual implementation and policy sequencing. For example, we believe the kneejerk market reaction to a Donald Trump victory may be positive, as the risk of tax increases or greater regulation gets priced out. But markets would soon likely move to consider potential tariff and deficit risks, which could temper any rally. In fact, cutting corporate taxes would likely only be possible if the Republicans control both houses of Congress, and the cuts may only be introduced after potential trade tariffs come into force, which could have more negative macro and equity market implications. Similarly, while markets may initially show concern about some of the tax, antitrust, and regulatory aspects of Kamala Harris’ policy platform, many are unlikely to be passed. In our view, the odds of her winning the presidency alongside control of Congress remain a remote outlier.

The election outcome may not be known for several weeks after the ballot closes on 5 November. The prospect of recounts and legal contests means that the winner might not be known before 11 December, the deadline for states to declare their electoral college votes. And even that date might not fully draw a line under the outcome if the result is still undecided or contested. Investors deferring investment plans in anticipation of the election result therefore need to factor in the potential risk and cost of a potentially long wait.

So, we recommend investors remain invested, as a well-constructed portfolio management plan should be able to withstand the market volatility surrounding a close election. Investors can consider hedges if they are particularly concerned about election outcomes, including capital preservation strategies, structured notes, and exposure to hedge funds and gold.

16 Oct 2024

Presidential and congressional elections are under way across America, with citizens in more than half of the states now voting either by mail or casting their ballots in person before Election Day. The race for the White House remains exceptionally close, with candidate preference polls giving Vice President Harris a slight edge in some battleground states and former President Trump narrowly leading in others. While it may be tempting to attribute the tightness of this year’s contest to the polarized political climate, it is worth remembering that presidential races are often decided at the margin. Since 1960, six different elections have been decided by fewer than 150,000 votes in just a few states.

Polling errors in presidential elections have undermined public confidence in the accuracy of election forecasts, but there were fewer such errors in the past two midterm elections. The presence of Donald Trump on the ballot in 2016 and 2020 may be one reason for the disparity in performance. Preference polls in the past have underestimated the former president’s ability to generate support from individuals who usually do not vote in other elections. Trump appears to have recognized his reliance on low propensity voters, which helps to explain his focus on rallying his base at the expense of broadening his coalition.

Harris has pursued a contrary strategy. She has focused on college-educated women, African American voters, and younger individuals not affiliated with either political party. Trump’s base of support is fixed, whereas support for Harris appears more fluid. The Harris campaign has responded by focusing on local organizing efforts to turn out voters; her campaign has deployed 2,500 campaign staffers in 350 offices, most of whom are in battleground states.

Prior to his withdrawal from the race in July, President Biden’s path to victory was exceedingly narrow and depended upon winning Wisconsin, Michigan, and Pennsylvania. Harris is a more competitive candidate in sunbelt states than was Biden and has more alternative paths to secure the requisite 270 electoral votes. However, both Harris and Trump are eyeing Pennsylvania and its 19 electoral votes as the most direct route to victory in November. Harris has 50 campaign offices in the state, while Trump has more than two dozen, and both candidates are expected to barnstorm there.

Donald Trump’s commanding lead in voter preference polls dissipated in late summer in the wake of Joe Biden’s unexpected withdrawal from the race. Kamala Harris’ early momentum closed the gap that had opened between the Republican and Democratic candidates earlier this year but her level of support among likely voters has plateaued. Trump and Harris are now in a dead heat with neither candidate holding a definitive advantage as we enter the home stretch of this election cycle. We have adjusted our probabilities accordingly (see the table below).

The US economy, a top issue for voters in most elections, is in decent shape, and equity markets have responded positively to the Fed’s forward guidance and less restrictive monetary policy. However, even though mortgage rates have declined, affordable housing remains a challenge in many parts of the nation and higher prices for everyday items continue to grate on consumers. The rate of inflation has declined, but it normally takes some time for the disinflationary impacts to be fully appreciated by voters. Public anxiety over illegal immigration poses the biggest challenge for Harris, while Trump faces criticism over restrictions on reproductive rights. Both candidates face entrenched opposition with fewer uncommitted voters to be swayed. The outcome is almost entirely dependent on voter turnout.

Democrats were always expected to face an uphill battle to retain control of the Senate considering the unfavorable map in this election cycle. The open West Virginia seat appears to be a lock for Republicans, and Democrat Jon Tester in Montana faces an uphill battle to surmount a sizable polling deficit. The Senate races in Ohio and Wisconsin have become more competitive as incumbent Democrats face difficult races. We have raised the probability that control of the Senate will shift to the GOP.

Control of the House of Representatives is less certain, but Democrats are well-positioned in this cycle simply because there are more seats held by Republicans in districts won by Biden than seats held by Democrats in districts won by Trump. Republicans often gain seats in one chamber of Congress while Democrats gain seats in the other, but it would be unprecedented in American history for those gains to result in a simultaneous change of control in opposite directions. And yet, in this cycle, we believe that is a better-than-even outcome. We assign a 65% likelihood that Democrats will assume narrow control of the House.

Source: UBS, as of 16 October 2024

2 Oct 2024

Despite their contrasting visions for America, the debate between Senator JD Vance (R-OH) and Governor Tim Walz (D-MN) was notable for its civility and decorum. The debate covered a wide range of topics—ranging from immigration to taxation to health care. Vice-presidential debates rarely affect the outcome of presidential elections, but Tuesday’s was more important for two key reasons: this presidential race is incredibly tight, and this may be the final debate between any of the candidates for the executive branch of government before the election. On substance, this debate delivered.

Senator Vance sought to tie high inflation and high rates of immigration to the current Biden-Harris administration. He reiterated a priority to restore domestic manufacturing capacity through the imposition of tariffs and sought to paint a picture that life was better for Americans under former president Donald Trump. Vance repeated references to his own family and it was a thinly veiled attempt to boost his own very low favorability ratings with voters, which may have helped to some degree.

Governor Walz focused on reproductive rights, health care, and the resuscitation of the American economy. He managed to deflect criticism of the Biden administration’s own immigration policies by emphasizing the failure of Congress to implement legislative reforms. His closing statement emphasized criticism of former president Trump’s tenure in office, which was hardly surprising given his roles as the Democratic VP candidate, but closed with an appeal for the audience’s vote. Both Vance and Walz competently solidified support from their respective political bases, and their requests for votes from undecided voters is yet another indication that both campaigns recognize that the outcome is likely to be very close indeed.

The list of potential October surprises was already quite long when the month began: the Israeli military launched a ground offensive into Lebanon for the first time since 2006, southeastern US states began the long and difficult process of recovering from the wreckage of Hurricane Helene, and east and Gulf coast port workers walked off their jobs—crippling as much as half of the country’s ocean shipping.

Neither party holds an iron-clad advantage in any of the key swing states with just five weeks to Election Day. Polls should soon show whether the small population of undecided voters have the information they need following this policy-focused debate to come off the sidelines. We retain our election probabilities as follows:

Source: UBS, as of 1 October 2024

19 Sep 2024

With just over six weeks until Election Day, the US presidential race appears like it may go down to the wire. Polling margins in key swing states are within the statistical margin of error. Looking at online prediction markets, Polymarket puts the odds of a Harris win at 51% versus 47% for Trump, with PredictIt putting Harris’ chances at 57% and Trump’s at 45%. However, prediction markets remain volatile.

In the houses of Congress, the race may be less finely balanced. We see an 85% chance the Republicans take control of the Senate, and a 65% chance that the Democrats take the House. This is important because a divided Congress would limit the legislative scope of the future president and could flip the market focus back onto corporate earnings, economic growth, and Fed policy.

We believe that investors and markets are likely to closely scrutinize the potential implications of the result on two key policy areas: trade and tax.

Trade: risk of higher tariffs

On trade, former President Donald Trump has pledged a 60% tariff on imports from China and a 10% tariff on imports from elsewhere in the world. We believe the former president may stop short of implementing these in full, given the potential economic impact and scope for negotiation. But there does appear to be scope for the president to implement such tariffs unilaterally, even in a divided Congress scenario, under the International Emergency Economic Powers Act.

Meanwhile, Vice President Kamala Harris has called Trump’s tariff proposals a “national sales tax” on US consumers but has also said she supports the Biden administration’s new tariffs on Chinese electric vehicle and solar panel imports. A Harris campaign spokesperson told the New York Times she would “employ targeted and strategic tariffs.” We believe at least a continuation of the status quo on trade should be considered likely under Harris.

Overall, we see a roughly 50% chance of “gesture” trade policies (e.g., periodic taxes imposed on specific products in order to make a political point or to emphasize certain policy priorities, similar to the current situation between the EU and China); a 40% chance of selective tariffs (e.g., measures targeting the broader practices of a country and applied across multiple sectors, similar to the US-China situation in 2018/19); and around a 10% chance of sustained universal tariffs.

For markets, a universal tariff scenario would have the greatest impact. If enacted, we would expect US equities to fall by around 10%, with the most negative impact on retailers, auto manufacturers, tech hardware, semiconductors, and certain industrial segments. The bond market may initially sell off on the higher inflationary impacts of tariffs. But over the medium term, we believe the market would likely return its focus to lower rates, as the higher cost of imported items would weigh on growth, consumer spending, and productivity.

Tax: personal tax cuts expiring

If no Congressional agreement can be reached and signed into law, the personal tax cuts implemented during former President Trump’s term in office will expire at the end of 2025 by default.

Former President Trump has campaigned on making the personal tax cuts permanent, as well as lowering the corporate tax rate (to 15% or 20% versus 21% currently) and the payroll tax rate. But this would likely only be possible if the Republicans control both houses of Congress (35% probability, in our view).

Vice President Harris has argued that tax cuts should be made permanent only for those Americans earning less than USD 400,000 per year. She also has expressed support for a higher corporate tax rate (of 28%) and higher capital gains taxes, though other aspects of her tax policy remain less clear. We believe that Harris’ proposed changes to tax policy are only likely to be implemented if the Democrats control Congress (15% probability, in our view).

How should investors act today?

While there are potential market risks related to trade and tax policy, Congressional arithmetic and the difference between campaigning and governing mean that the most negative scenarios are unlikely, in our view. And investors need to balance these risks with the fact that, historically, US equity markets have on average rallied both into and after presidential elections. We therefore recommend that investors avoid making big portfolio decisions based on hopes and fears about the election. Instead, investors should focus more on hedging and managing specific risks.

Capital preservation strategies or adding exposure to gold are two ways to manage portfolio downside risks and volatility. We see potential in the theme of “reshoring” as companies reroute supply chains to navigate tariff risks. We also recommend managing risks to some of the most potentially election-sensitive stocks, including those within the US consumer discretionary and renewables sectors, as well as currencies like the Chinese yuan.

11 Sep 2024

US Vice President Kamala Harris and former President Donald Trump had never met in person before they took the stage on Tuesday evening with eight weeks remaining until Election Day. A brief handshake at the beginning of the event yielded to vigorous exchanges of criticism and contentious debate. Both candidates sought advantage in a presidential race that, when the night began, was essentially a statistical dead heat based on national opinion polls and very narrow margins in critical swing states.

The two candidates offered sharply contrasting visions for the country. They clashed on the economy, immigration, fracking, reproductive rights, and foreign policy. Harris often directed her comments straight at the former president, highlighted a range of middle-class tax cuts and small business incentives, and criticized the former president’s support for tax cuts for the affluent and broader tariffs. Trump garnered more speaking time than did Harris but preferred to direct his comments to the two moderators and leveled criticism at the Biden administration generally, and Harris in particular, in the areas of inflation and border security.

US presidential debates often are remembered for isolated instances when a candidate responded with a clever rejoinder, offered a memorable soundbite, or committed a noteworthy gaffe. In an era when attention spans are short and social media is pervasive, these moments can have a lasting impact as they are recirculated repeatedly in subsequent advertisements and posts. There were few obvious examples of that happening this time, but our general conclusion is that Harris held the advantage by the end of the night.

Former UK PM Harold Wilson reportedly said “a week is a long time in politics.” Apart from the debate between Trump and Biden in June, this is the earliest US presidential debate in the modern era, so there is still considerable time for the opinion polls to shift. Harris turned in a stronger performance, especially relative to expectations heading into this highly anticipated event. As a result, we retain our probabilities following tonight's debate.

Source: UBS, as of 11 September 2024

22 Aug 2024

President Joe Biden’s decision to withdraw his bid for a second term in office and endorse Vice President Kamala Harris as the Democratic nominee have transformed the US electoral race. Although “hypothetical” polls prior to Biden’s withdrawal appeared to show little advantage to a change in candidate, national polls now give Harris a three-point¹ advantage over former President Donald Trump. Harris has also improved on Biden’s position in some of the critical swing states.

While we continue to caution against reading too much into the polling data at this stage, we adjusted our probabilities on 16 August to reflect the recent momentum shift. We now assign a 40% probability to a Harris win with a divided Congress (Republican Senate, Democratic House), and a 15% probability to a “blue sweep” in which Democrats win the presidency and control both the House and Senate (both up 5 percentage points versus our previous projections). We see a 35% probability of a “red sweep” and a 10% probability of a Trump win with a divided Congress (both down 5 percentage points).

The recent shifts in the race reinforce why investors should avoid making outsized portfolio moves in anticipation of specific election outcomes. But investors looking for ways to insulate portfolios from election-related volatility can consider adding exposure to gold and the Swiss franc—both seen as so-called “safe-haven” assets by the market.

We have also identified some of the most potentially election-sensitive stocks, including within the US consumer discretionary and renewables sectors, as well as currencies like the Chinese yuan, where we recommend that investors manage any overexposure.

¹FiveThirtyEight.com, as of 21 August

16 Aug 2024

The last two weeks of summer in the US are often viewed as an ideal time to take a break from the daily grind of work and to restore one’s energy levels. Washington is no exception. Members of Congress return home to hear from their constituents and presidential candidates often take a brief break before a final, frantic two months of campaigning.

The circumstances are different this year. President Biden’s abrupt decision to withdraw from the race in July and endorse his vice president altered the dynamics of the contest. Kamala Harris promptly garnered enough support from fellow Democrats to be anointed as the party nominee. The consequences are still unfolding, but the momentum has shifted significantly in just three weeks.

Recent polls suggest that Harris is better positioned in a head-to-head contest against Donald Trump. She has gained more than 6 points in national polls and improved on Biden’s position by a similar margin in some of the critical swing states. Meanwhile, former president Trump’s prospects in some states that lean Democratic, such as Virginia and Minnesota, have dissipated in recent weeks. Robert F Kennedy, Jr. also appears to have lost ground in the race, and the independent candidate now appears as less of a factor in the outcome.

Harris still faces the task of defining herself and her policy platform for uncommitted voters. This week’s Democratic National Convention will give her an opportunity to do so, as will next month’s scheduled debate with Donald Trump. The abbreviated campaign probably helps Harris as it allows less time for Republican critiques of her policy positions to alter perceptions. We have adjusted our probabilities to account for the shifts in likely voter behavior and will continue to monitor developments in what is shaping up to be a spirited contest.

Source: UBS, as of 16 August 2024

6 Aug 2024

Vice President Kamala Harris is now officially the Democratic Party’s presidential nominee after having obtained 99% of the delegate votes cast in a virtual roll call that ended Monday night. In anticipation of her acceptance of the nomination, Harris has chosen Minnesota Governor Tim Walz as her running mate. In choosing Walz to join her on the ballot in November, the vice president opted for a popular governor with prior experience as a member of the House of Representatives.

Governor Timothy Walz was elected as the 41st governor or Minnesota in 2018 and re-elected in 2022. Prior to his service as governor, he represented Minnesota’s first congressional district in the US House of Representatives in 2007-19. He is a native of Nebraska, a retired teacher, and a former non-commissioned officer in the US Army. He has exhibited an ability to win elections in conservative-leaning congressional districts, which may have appealed to Vice President Harris in the context of what is shaping up to be a close presidential election.

Presidential nominees in the modern era generally have an unfettered ability to choose a running mate without much input from party leaders. The factors that go into choosing a vice president vary from one election to another. The decision often reflects a desire to add some diversity to the ticket, whether by region, gender, race, or age. In other instances, the choice comes down to healing a divisive rift in the party or to consolidate support from an important constituent group. Look no further than Donald Trump’s selection of Mike Pence in 2016, which consolidated support for his candidacy among rural conservative and evangelical voters.

In choosing Walz, Harris appears to have acknowledged the need to recruit an individual whose background is about as far removed from her political base in San Francisco as possible. Walz was a late arrival to the vice presidential sweepstakes. He was supported by progressives and moderates within the Democratic Party.

The presidential election has been transformed in the past five weeks. President Biden’s decision to withdraw from the race, followed by Vice President Harris’s pending nomination, has made the race competitive. Former president Trump no longer retains a polling advantage in all seven critical swing states, where both candidates’ narrow advantages are well within the margin of error. With three months to go before Election Day, the race is now too close to call.

24 Jul 2024

President Joe Biden’s withdrawal from the presidential race on Sunday altered the competitive landscape for the US general election in November. The unprecedented decision by the president to withdraw from the race very late in the campaign leaves the choice of a new nominee to delegates at the Democratic National Convention. Vice President Kamala Harris has consolidated support among enough state delegations to become the presumptive Democratic nominee. She currently faces no meaningful competition.

The rules committee of the Democratic National Committee has decided to hold a virtual roll call vote in advance of the convention to insulate the nomination process from potential legal challenges arising from state filing deadlines. Individuals wishing to become the Democratic nominee must declare their candidacy by 27 July, and obtain the support of at least 300 delegates by the following day, with no more than 50 from a single state. The virtual roll call will commence on 1 August. The candidate winning a simple majority will be declared the party nominee and will be obliged to select a running mate by 7 August to ensure compliance with state ballot requirements.

We expect the Vice President to obtain a majority of votes and be declared the Democratic Party nominee. A ceremonial vote will occur again in Chicago, where delegates also will vote on the party’s policy platform. From that point forward, the pace of the presidential race will pick up dramatically with both candidates seeking to score points in what is shaping up to be a more competitive contest.

In conjunction with the UBS US Office of Public Policy, we are revising our forecast for the election outcome to reflect President Biden’s withdrawal. Former president Trump still holds a narrow advantage but the Harris campaign’s ability to raise $125 million in just two days reflects an uptick in enthusiasm among Democrats and presages a tighter race to the finish.

Source: UBS, as of 24 July 2024

21 Jul 2024

What happened?

President Joe Biden has withdrawn his candidacy for a second term in office and endorsed Vice President Kamala Harris as Democratic nominee. The announcement was made after weeks of deliberation following a disappointing performance in a debate with Republican nominee Donald Trump on 27 June.

The president had been on the receiving end of pleas to withdraw from the race from increasingly senior Democratic Party leaders and top donors skeptical of his ability to govern for another four years.

Former President Trump’s polling lead—both nationally and in swing states—had also widened following a failed assassination attempt last weekend.

Democrats will now need to select a new nominee at their convention in Chicago from August 19–22. Vice President Kamala Harris is widely seen as the front runner.

What comes next?

The focus will now shift to the confirmation of a new Democratic nominee, whether there will be any material differences in their policy priorities that could affect markets, and whether the new nominee will be more likely to defeat former President Trump in November.

First, Biden’s withdrawal and subsequent endorsement of Kamala Harris leaves her well positioned to capture the nomination. But she still must convince convention delegates, who are no longer bound to support Biden, that she is the individual best positioned to defeat the Republican nominee in November. We expect her to emphasize the continuity of Biden’s platform, her service as vice-president, and her ability to appeal to women, younger voters, and voters of color.

Other candidates may emerge prior to the convention, including a handful of governors who could argue that their net favorability ratings are higher than the vice president’s. However, Harris has another point of leverage, which may prove conclusive. In the Biden campaign’s filings with the Federal Election Commission, she is included on the statement of organization, which means that she will encounter fewer legal obstacles in the use of the Biden campaign war chest.

Second, we would not expect a major shift in policy priorities from any of the top Democratic contenders on the issues of concern for investors. The continuity would be clearest if Harris becomes the nominee. But we would not expect any Democratic nominee to deviate significantly from Biden’s focus on climate change, increasing scrutiny of anti-competitive practices by large businesses, and maintaining pressure on China over its trade practices.

Third, Biden’s chances of reelection were undermined by his faltering debate performance on 27 June. It is also possible that Trump’s defiant response to last week’s assassination attempt could consolidate the support of his base, and even win over some undecided voters—though this is not yet clear. Prior to Biden’s exit from the race, we had seen a 60% chance that Trump retakes the White House, with a 45% probability of a “red sweep.” We had also seen a 15% likelihood of a Trump presidency with a split Congress, a 30% probability of a Democratic win with a split Congress, and a 10% probability of a “blue sweep.”

Biden’s withdrawal resets the contest. However, to the extent that Harris is nominated to succeed Biden as the Democratic standard-bearer, we believe the dynamics of the election will not change as much as one might expect. The American electorate is highly polarized and most of Biden’s supporters will be reluctant to abandon the party’s nominee.

Over the coming months, we expect both political parties to focus on turnout in November as the critical factor in the outcome. Democrats must motivate younger voters. Republicans must encourage voters who prefer Trump to express that sentiment at the polls on election day.

We are also reluctant to draw too many conclusions from historical polling of hypothetical matchups between Trump and other Democratic contenders when Biden was the presumptive nominee. It will take time for polls to reflect voter preferences in what are no longer hypothetical matchups but rather real possibilities. Furthermore, we are mindful that there are still three-and-a-half months between now and election day.

Biden’s unprecedented decision to withdraw from the race poses a significant challenge for the Democratic Party but also forces the GOP to devise a fresh campaign strategy against a new and younger opponent.

How should investors respond?

The outcome of the election could be consequential for investors, especially if either party wins control of both the White House and Congress.

A Trump victory—especially if supported by a Republican majority in Congress—would likely raise market expectations of tax cuts and lighter business regulation, while adding to concerns over higher trade tariffs. Primary beneficiaries of regulatory changes could include the financial services sector, while higher tariffs on imports could harm US companies with global supply chains.

Meanwhile, a Democratic administration would likely continue to support initiatives benefiting green energy, efficiency, and electric vehicle makers.

In the near term, we should expect some market volatility as investors digest the news. We have seen some rotation toward “red” sectors and away from “blue” ones in recent weeks as recent momentum has favored the Republican party. That could at least partially reverse in the coming days as markets parse the latest developments.

That said, investors should remember that US political outcomes are far from the largest driver of financial market returns, or even sector performance. Economic data and Fed rate cut expectations remains at least as important. In addition, much can still change ahead of November's ballot and a range of outcomes remain possible.

We therefore advise investors against dramatic shifts in portfolio strategy based on their expectations or political preferences. Instead, we recommend various strategies to manage the risks surrounding the election, including holding a well-diversified portfolio and considering structured investments with capital preservation or yield generation features.

Our base case that the S&P 500 ends the year around 5,900, modestly higher than the current 5,505, would hold in most political scenarios—barring a Democratic sweep of power that leads to higher corporate taxes, or a scenario in which former President Trump imposes trade tariffs that are as high as proposed in his campaign speeches. We consider either outcome unlikely at present. In addition, we believe the positive outlook for top US tech companies is likely to more than offset political uncertainty.

We will continue to monitor campaign developments closely and will keep you informed about the potential implications for the election and markets at ubs.com/electionwatch.

17 Jul 2024

Global investors are growing more confident that former President Trump will reclaim the US presidency this November, with his prospects strengthened by both the failed assassination attempt and President Biden’s campaign struggles. This has put a renewed focus on likely policies in a second Trump term, including a pledge to extend tax cuts and levy higher import tariffs on China.

A second Trump presidency could indeed result in higher fiscal deficits, renewed inflation, and some upward pressure on yields. But the Trump trade itself is not necessarily about higher rates across the curve, but instead underperformance from the long end. Since the pre-debate close on 27 June, two-year yields have come down around 29 basis points, 10-year yields have declined 11bps, and 30-year yields have fallen 2bps.

Looking ahead, we anticipate US rates and government bond yields will broadly continue to decline and suggest investors act now to put cash to work:

Federal Reserve policy will be driven by inflation and labor conditions, not fiscal deficits. Fed Chair Jerome Powell this week made clear that the US fiscal deficit, while a concern “over time,” is outside the Fed’s mandate. Instead, Powell reiterated the Fed remains focused on reining in inflation, and that the latest three data points “do add somewhat to confidence” on progress. Other Fed speakers this week have echoed this sentiment, with San Francisco Fed President Mary Daly saying “confidence is growing” in reaching the 2% target, and Fed Governor Adriana Kugler noting she’s “cautiously optimistic.” We continue to expect the first Fed cut in September.

This means the attractive starting yield from quality fixed income is unlikely to last for much longer. With the Fed likely to join the global rate-cutting cycle soon, we believe US bond yields will fall. The 10-year US Treasury yield is currently trading in the upper range of the past five years, providing a favorable chance for investors to lock in rates that could offer ample buffer against ongoing volatility and attractive portfolio returns as yields fall. We see scope for significant capital appreciation as markets start to price deeper rate cuts into next year, or in the event of a growth shock.

Bonds have historically outperformed cash over the long term while offering diversification benefits. Cash looks set to deliver progressively lower returns as central banks continue on their easing paths. Historically, the probability of US bonds outperforming cash rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively. In addition, we note that high-quality bonds are among the safest investments in an investor’s portfolio, as they can preserve capital, reduce equity volatility, and stabilize portfolios.

So, we remain most preferred on fixed income in our global portfolios. We recommend investors position for rate cuts by buying quality bonds, implementing bond ladders, and holding diversified fixed income positions with satellite exposure to riskier credits to improve overall portfolio yields. This also applies to sustainable investments into green, social, and sustainable bonds, as well as those issued by multilateral development banks.

15 Jul 2024

Former president Donald Trump has selected the junior senator from Ohio, JD Vance, as his running mate for the 2024 general election campaign. Trump waited until the start of the Republican National Convention in Milwaukee to announce his choice, which is not unusual. Other presumptive nominees in the past have waited until the proverbial last minute to make such a selection. Trump and Vance will be formally nominated as the GOP candidates for president and vice president, respectively, this week. Vance was on the short list of individuals being vetted by the campaign, so his selection is not a surprise.

In the modern era, presumptive presidential candidates generally have enjoyed an unfettered ability to choose whomever they prefer as a running mate. Personal and ideological compatibility is often the primary criterion, but attempts to diversify the ticket by age, regional origin, race, and gender have all been in the mix. In this instance, age may have been an important factor in Trump’s decision. Vance will be just 40 years old on Election Day, thereby providing a contrast to the two parties’ current standard-bearers. He is an accomplished author but a relative newcomer to national politics, having been elected to the US Senate in 2022.

While the choice of a running mate rarely affects the outcome of a presidential election, the decision is crucial because one-third of US presidents throughout American history have previously occupied the position of vice president. Moreover, in this instance, Trump’s decision effectively anoints Vance as his successor in terms of delivering a populist message to a younger generation of voters.

15 Jul 2024

On Saturday evening, former President Donald Trump was wounded in an assassination attempt during a campaign rally. A bystander was killed, and two others were critically wounded. The assailant was shot dead by security services.

The Trump campaign team said the former president is “fine,” and pictures showed him raising a fist to supporters as he was being escorted away after the attack. President Joe Biden said that he was “grateful to hear that he’s safe and doing well” and that “everybody must condemn” the violence. The assailant was identified, though his motives are still unclear.

What's the context?

The attempted assassination comes at a highly charged moment in US politics, with the campaign marked by intense rhetoric, significant media coverage, and a divided electorate. The shooting took place just over two weeks after the first televised debate between the two candidates, which led to an increase in the polling lead for former President Trump.

Assassination attempts on US presidents or candidates are unfortunately not uncommon in US history. Four sitting presidents and one candidate have been assassinated since the founding of the Republic. In 1981, Ronald Reagan was the most recent sitting president to be wounded in an assassination attempt.

What are the implications for the election?

In the near term, we expect reduced formal campaign activity as security measures are increased and campaign messaging is reviewed. We note that the Biden campaign has already paused communications. This could lead to more controlled and less accessible campaign events, which would impact voter engagement and campaign dynamics.

A key question will be how the assassination attempt affects swing voter attitudes. President Reagan saw an immediate increase in his popularity following the attempt on his life in 1981, though the bump in support ebbed within three months following the incident.

In the aftermath of the recent Biden/Trump debate, we revised our election scenario probabilities, now ascribing a 45% probability to a “red sweep,” 30% to a Democratic victory with a split Congress, 15% to a Trump victory with a split Congress, and 10% to a “blue sweep.”

For now, with the Republican National Convention taking place this week, we leave the aforementioned election scenario probabilities unchanged.

Investment conclusions

The attempted assassination of Donald Trump adds a new layer of complexity to an already tumultuous election season. We have said that investors should not make major portfolio swings in response to campaign developments or in anticipation of any particular election result, and that applies in this case too.

Investors looking to navigate the potential for increased market volatility and to reduce exposure to political uncertainty can consider the following strategies:

In equities, we think investors should manage exposure to individual stocks and sectors that could be more at risk in different election outcomes. This includes the consumer discretionary sector, which would likely suffer from higher import tariffs. To manage potential election-related volatility, investors can use defensive structured investment strategies, such as capital preservation or yield-generating approaches for election-sensitive stocks or cyclical sectors like energy, industrials, and financials.

In fixed income, while we like quality bonds, investors should be mindful of potential risks in longer-duration bonds if concerns about the US deficit increase. In currencies and commodities, we like the safe-haven Swiss franc and gold. We also think investors should manage exposures to currencies sensitive to US trade risks, including the Chinese yuan and Mexican peso.

We will continue to monitor campaign developments closely and will keep you informed about the potential implications for the election and markets at ubs.com/electionwatch.

12 Jul 2024

President Biden began his eagerly awaited press conference on Thursday evening with a review of the NATO Summit in Washington and a recitation of his administration’s accomplishments. His introductory remarks amounted to a vigorous defense of multilateral engagement as the foundation of American foreign policy. They were also designed to establish a more favorable context in which to parry questions from the media over his physical fitness and mental acuity.

His performance was decidedly mixed, however, with spirited comments on the topic of gun control undercut by fumbles over whether his own vice president was capable of assuming the presidency and winning a national election. In short, the presser is unlikely to change many minds over whether he should continue to pursue the nomination at next month's convention.

At least one response may come back to haunt the president. As the press conference was nearing its conclusion, he responded to a question on whether convention delegates should be bound to vote for him. He responded by saying that the delegates “are free to do whatever they want.” The rules currently direct delegates to reflect the “sentiments of those who elected them.” The president may have inadvertently provided his own party’s rules committee with an opportunity to alter the instructions given to delegates and thereby allow them to vote their conscience in the crucial first round of balloting. While the probability of a rule change is still low, the president may have just committed an unforced tactical error. 

28 Jun 2024

In the wake of the first general election debate between Joe Biden and Donald Trump, we have received questions from investors regarding the procedures by which the Democratic Party chooses it nominee. We answer the most frequent inquiries below. We do not express a view on the probability of another individual being awarded the nomination.

1. How are delegates to the Democratic Convention awarded to prospective candidates? Delegates are awarded based on the results of state primary elections. The state-by-state primaries have now concluded.
2. Are the delegates obliged to support the candidates in accordance with the results of the primary elections in each state? Pursuant to Democratic Party rules, delegates must “in all good conscience reflect the sentiments of those who elected them.” This is generally interpreted as a binding commitment, although there is some imprecision in the text of the rule.
3. Can the Democratic Party change the nomination rules? Yes, the Democratic National Committee could change the rules ahead of the convention. But this is unlikely as the overwhelming majority of registered voters affiliated with the Democratic Party expressed their preference for President Biden in his campaign for a second term.
4. Are there enough uncommitted “super delegates" (e.g., current and retired office holders) to alter the result? No. Democratic Party rules state that super delegates are only allowed to cast a vote if a candidate does not win a majority of the delegates on the first ballot. The president has more than enough delegates to win on the first ballot.
5. If the president decides to withdraw before the convention, does Vice President Harris automatically become the Democratic nominee? No. The delegates currently pledged to Biden would be free to vote for whoever they prefer. The vice president would have a distinct advantage, but other candidates could submit their names for consideration and seek support.
6. What happens if the president withdraws from the campaign after the convention? The Democratic National Committee would choose a replacement candidate, but the process is without modern precedent.
7. Are there plans to hold a virtual convention before the planned convention dates in August? Yes. There are plans to hold a virtual roll call vote in advance of the Democratic National Convention in August because the State of Ohio has imposed an 7 August deadline to certify presidential candidates for the November ballot. The virtual roll call vote would allow the party to place a Democratic candidate for president on the ballot in Ohio.

28 Jun 2024

The nationally-televised debate on Thursday evening between America's two presumptive presidential candidates was unprecedented in a variety of ways. First and foremost, while both individuals have a sufficient number of committed delegates to capture their party's nomination, neither one has been formally nominated. No other general election debate is scheduled until the third week of September, after the conventions, which suggests that both campaigns believed they had something to gain from an early engagement.

The structure of the debate, with muted microphones and the absence of a live audience, was expected to favor Joe Biden. It did not. Donald Trump used the format effectively to deflect the moderators' more uncomfortable questions and focus instead on other topics to his advantage. President Biden was very subdued as the debate got underway, with a stiff gait and a hoarse voice. He ceded control of the narrative almost immediately to his predecessor and failed to assuage concerns over whether he could withstand the rigors of another four years in office.

Another debate between the two candidates has been scheduled for September. President Biden, should he choose to accept the Democratic nomination, will affirmatively want to engage in that debate. Former president Trump, now holding an advantage, may be reluctant to offer Biden a second opportunity.

The US electorate remains unnervingly polarized, and we expect to see a great deal of discussion over whether investment portfolios should be reexamined. Adjusting one's longer-term financial plan abruptly in the wake of a single debate more than four months in advance of an election entails risk and may end up being counterproductive. Longer-term portfolio construction is best treated as an apolitical exercise.

However, with that said, for those investors intent on making some tactical adjustments, managing one's exposure to sensitive sectors is a good place to begin. The consumer discretionary and renewable energy sectors could lag in performance in a “red sweep” scenario. On the other hand, the financials sector, has more potential upside in that scenario.

20 Jun 2024

The upcoming US presidential election looks set to increase market volatility. We can already identify a distinct “kink” in the VIX futures curve around November, indicating expectations of higher US equity volatility around the election day.

Recent polls give the Republican former President Donald Trump a narrow lead over Democratic President Joe Biden, at 40.8% versus 40.2% based on FiveThirtyEight’s national polls tracker as of 18 June. Theoretically, that leaves a significant portion of voters who remain undecided and will likely determine the election. However, at this stage in the cycle, national polls may be less useful than polls in the most competitive states.

We assign a 45% probability to a “red sweep” scenario of a Trump victory and Republican control of the Senate and House of Representatives; a 40% probability to a Biden victory with a divided Congress (Republican-controlled Senate, Democratic-controlled House); a 10% probability to a “blue sweep” (Biden victory and Democratic control of the Senate and House); and a 5% probability to a Trump victory with a divided Congress. But the key takeaway at this stage is that the outcome remains uncertain, and no single outcome can be considered as “likely.”

It’s important to remember the principle that investors should vote at the ballot box and not with their portfolio. In particular, we think investors should ensure that political fears don’t lead them to defer investment decisions that would otherwise support their long-term financial goals. Investors should also be aware of how political sympathies can impair objective judgements.

Academic research supports the belief that political affiliation has a direct impact on one’s level of optimism regarding the future direction of the economy.¹ Investors who share an affiliation with the party in office are more likely to believe that financial assets are undervalued and respond by increasing their allocation to equities.² Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy. This partisan bias can have a meaningful impact on returns.

However, while we believe portfolio construction is best treated as an apolitical exercise, the election will impact markets and government policy. The 2016 election, when Donald Trump was elected, led to divergent outcomes, and while the assets affected may differ this time around, we expect volatility. We therefore think it is prudent for investors to consider the potential risks to their wealth and manage those risks accordingly.

¹Maarten Meeuwis and Jonathan Parker et al., “Belief Disagreement and Portfolio Choice,” National Bureau of Economic Research, Working Paper 2510, September 2019; Yosef Bonaparte and Alok Kumar et al., “Political Climate, Optimism, and Investment Decisions,” University of Miami, February 26, 2012; Marian Moszoro, “The Party Politics of Stock Market Investing,” George Mason University, March 25, 2019; and Harrison Hong and Leonard Kostovetsky, “Red and Blue Investing,” Princeton University, March 2010.

²Bonaparte, Kumar et al., “Political Climate, Optimism, and Investment Decisions.”

31 May 2024

A New York jury found former US President Donald Trump guilty on 34 counts related to the falsification of documents around payment to an adult film star ahead of the 2016 election. This marks the first time a former US president has been found guilty of a crime in the US. The trial judge is scheduled to sentence Trump on 11 July, just days before the 15 July Republican National Convention. Following the ruling, Trump said he was innocent and suggested “the real verdict will be on 5 November.” The case is one of his four criminal trials currently under way in the runup to the November election.

Our view: Early voting begins in June and culminates in the 5 November vote, which means this may be the only Trump trial to reach a verdict prior to the bulk of voting. It is unclear how this court outcome might impact the electorate, but in key swing states, Trump holds a 2–3 point advantage, and surveys indicate inflation and cost-of-living concerns are the primary focus for centrist and independent voters. While a pickup in market volatility can be expected in the lead-up to the election, we continue to believe that portfolio construction is best treated as an apolitical exercise. We expect Fed policy, inflation, and corporate profit growth to remain key market drivers this year, and we continue to see a supportive macro backdrop for quality bonds and stocks.

23 May 2024

Investors don’t like uncertainty, so we shouldn’t be surprised if we see a pickup in equity market volatility as November’s US election nears. In addition, geopolitical tensions, including the ongoing wars in Gaza and Ukraine, have the potential to trigger market volatility. The rise in gold prices following the death of Iranian President Ebrahim Raisi in a helicopter crash this month serves as a reminder of this potential.

As the election nears, market focus on specific policy measures is likely to increase. In the past month, US President Joe Biden announced new tariffs on imports of Chinese electric vehicles, advanced batteries, solar cells, steel, aluminum, and medical equipment. Duties on EVs are to be increased to over 100%. China vowed retaliation, with the Ministry of Commerce saying Beijing would take measures to defend its interests.

With only 4% of US imports from China and less than 1% of China’s total exports impacted, the economic ramifications of the latest tariffs are small. However, the wider trend is that, regardless of which candidate wins the US presidential election, we expect to see more protectionism, more obstacles to free trade, and a fracturing of the status quo ante. We note that while former President Trump initially introduced several tariffs, President Biden retained most of those when he assumed office.

That said, there are likely to be some differences in the way in which protectionism is implemented. We would expect Biden to continue using tariffs on a more targeted basis, with a focus on China and a limited number of other countries. Trump may use tariffs more broadly as a point of leverage to extract concessions, and while his primary focus may be on China, he would likely not exempt geopolitical allies, including in Europe. (For our analysis of the potential outcomes under different scenarios for control of the White House and Congress, see our ElectionWatch report, “Politics beyond borders,” published March 2024.)

Portfolio construction is best treated as an apolitical exercise, but differing policies are likely to mean a different impact on markets depending on the victor. With stock market volatility currently at low levels, this speaks to considering capital preservation strategies within equities, as well as being both selective and diversified in international market exposure.

Gold and oil remain valid geopolitical hedges, in our view. Gold should additionally benefit from strong central bank demand and falling rates. We expect gold prices to reach USD 2,600/oz by the end of the year, as the aforementioned market dynamics likely drive fresh exchange-traded fund inflows. We also see upside for oil prices (we forecast Brent crude at around USD 87/bbl by the end of the year) amid solid demand and efforts by OPEC+ to balance the market. Risk-tolerant investors can consider selling Brent’s downside price risks for yield.