As US presidential elections approach, a few points should be taken into consideration from the recent Brexit vote impact on financial markets.
Donald Trump will take on Hillary Clinton in November’s election and polls place both candidates close to par with each other.
So what should one be wary of?
For starters, Donald Trump’s ideologies over and above his unethical remarks throughout his campaign have done little to thus far undermine the candidate’s popularity amongst republican voters. If the US election is swung on the power and success of a campaign, then Trump could be on course to shock the world and become the next US president.
Many didn’t believe a Brexit was possible, yet the rational decision in the end showed it doesn’t always prevail.
US markets have rallied since the end of June, somewhat flattening mid-way through July to date on mixed housing, labour and unemployment data. The S&P 500 went on to set a new all-time high as investors so far remain confident prolonged further interest rate hikes by the Federal reserve could cater for US corporations to justify their market prices and generate positive sets of future results.
Having said that, the US energy sector should be omitted from the above statement. Despite recovering throughout the year, the sector took a further blow this week on earnings misses by major energy corporations, seeing the price of oil dip yet again below the $40 a barrel. The sector faces continued headwinds before seeing any signs of a stable recovery.
Come November, an unfavorable US election result, would in my opinion, cause initial market movements to imitate the ones seen in Britain post-Brexit. Hedge fund managers in the states could experience large sets of outflows, prompting equity and high yield indices to sell-off, as shaky investors move to park their funds in investment grade safe havens. The USD could depreciate against a number of peers, albeit marginally, as safe haven inflows could see substantial demand for US treasury notes amongst other global investment grade sovereigns.
Recessionary threats could also arise around the uncertainty Trump’s future policies would bring on US trade and the wider economy.
If investors are short of options, the Arms industry wouldn’t be a bad shout to consider for the risk-loving individual. Increased geo-political tensions, terrorist attacks and the republican candidate’s stance on firearms and views of distancing the US from major global allies leaves little to the imagination in picturing global relationships going south.
We are luckily not there yet. Volatility will persist until an election outcome is known and opportunities will arise in identifying undervalued short term trade positions. However, in a volatile market, investment decisions should be taken on the fundamentals and so far US data is supportive to justify investment inflows.
The risk taking investors should keep a likely unfavorable election outcome in mind when determining their portfolio allocation weightings. A cautious underweight exposure to the US would not generate the returns one would see with a Clinton vote outcome but should outweigh the slump US markets could experience with a Trump victory.
Disclaimer: This article was issued by Mathieu Ganado, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.