US elections

If you have watched the US presidential debate, you are probably feeling somewhat deflated for democracy.

The Democrats will likely switch Joe Biden out from here, but there are few options—Gavin Newsom and, possibly, Kamala Harris.

However, GN is largely unknown, and KH doesn’t poll well. So the odds of a Trump Presidency Mark 2 are much higher now.

What does this mean for markets?

Well, last time, on the night of the election outcome, equity markets fell. But by the morning, they rose, and rose strongly, given Donald tends to favour lower tax rates (which he pressures Congress for), lower interest rates (which he pressures the Fed for) and higher spending. That’s all fairly good for corporate profits, and the result was a solid performance from the S&P500 over the course of the Trump administration.

The US dollar was also reasonably strong.

What about now? Today, I saw many commentators calling for a weaker US dollar, and a weaker USD usually goes along with stronger commodities and stronger emerging market performance.

It is possible that the USD will drop because people lose faith in USD denominated assets, effectively pricing in a Trump-related risk premium. But it is also quite possible that the dollar fares well, given extra spending would likely raise rates. If the Fed isn’t hiking (indeed maybe cutting, in deference to Trump’s wishes or pressures), it’s likely that longer dated bond yields would have to rise. Thus, the USD would rally (to help that sentence make sense, you’ve just got to remember that “something” equilibrates, either short rates, long rates, or the FX, and if you aren’t moving short rates the other two will move).

It is also possible that even if the US is the source of the uncertainty, the USD itself does well as a “flight to quality” hard currency.

Yep, that’s convoluted.

I would, at least as of right now, place myself in the stronger USD camp. That’s probably not a robust tailwind for commodities.

If Trump puts up material tariffs on trade with China, I think it fair to say that China’s key exports (e.g. steel) would be pressured, and thus some of China’s key imports (iron ore) would be pressured.

Ex-China steel producers might do quite well if cheap Chinese steel exports are “tariffed” out of the market.

Demand for climate change related commodities might also suffer, as Trump has often been more closely aligned to oil, gas and coal than to EVs and that might continue to pressure lithium and other EV related commodities.

We’ve said before it is likely that Ukraine will find itself with less support, meaning Europe has to step into the breach. That might mean weakness for European equities, but it might also draw Europe (once more) together in a way that keeps the European compact alive. I have little idea what that means, in practical terms, but I think things that strengthen Europe’s resolve to work together lower, not raises, the equity risk premia within European equities.

More spending on defence might also cause the Euro to strengthen.

So, what am I most sure of?

I would tip stronger USD, weaker China exports, and weaker Australian imports related to China, and I would prefer oil and gas-related assets to other commodities in general.

These opinions are all weakly held.

Equity markets could go either way. That isn’t especially helpful from an asset allocation perspective, but there you have it. If the market is “inclined to sell off”, which the market can sometimes be (i.e. skittish, looking for a reason to sell, to “take profits”), this could well be that catalyst. If the market is keen to price action on tax rates, it could well grind higher.

If it were to fall on a widening Trump uncertainty risk (and markets do not like uncertainty), we’d likely buy. I don’t see the election introducing a long term permanent premium to US equities. But we’d likely wait for something meaningful first (a fall of at least 5%).

We are diversified across geographies, currencies, and asset classes, so it doesn’t matter much overall, and that is, of course, by design. But perhaps some of the above ruminations are useful.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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