'Risks off' as markets await outcome of US election

Singapore

MARKETS are still betting on a Hillary Clinton victory in this week's US presidential election, despite some nervousness caused by the resurgence of her email controversy. But investors are advised to stay on the sidelines until after a clear winner is announced, likely on Wednesday morning in Asia.

Hedges such as equity put options and gold are recommended. Consensus opinion is that markets could plummet if unpredictable businessman Donald Trump manages to get elected by winning in most swing states.

"Making directional bets on political events is often problematic," said Bank of Singapore investment strategist James Cheo in a Nov 2 report. He likes equity put options that hedge against a rise in volatility, and prefers credit over equities until election uncertainty subsides.

Citi strategists, in a note on Nov 3, argued for a decrease in long-term emerging-market (EM) bond exposures. "A Clinton win is still our base case, we see the probability of a Trump win at 25 per cent. We keep a negative bias on EM duration, and we stay cautious on EM (currencies) into the election," they said.

In a Clinton victory, the US dollar could weaken against the Mexican peso after having gained ground on Trump fears, said Kay Van-Petersen, global macro strategist at Saxo Capital Markets.

"Overall, it would be kind of boring, yet a large part of the uncertainty in the market - the part tied to the US election - would be eliminated, and that's always structurally helpful," he said in an Oct 31 commentary.

A Trump upset would lead to a "massive risk-off in US equities which would spiral into global equities".

But he said that could be a buying opportunity as markets realise Mr Trump is pro-business, will have to deal with a hostile Congress to get things done, and crosses the very low bar set for him.

Risks of a Trump presidency and the rise of populism have been well discussed, with commentators expecting the event to unsettle EMs, Asia and trade-dependent Singapore.

Raj Manghani, head of Asia-Pacific analytics at index provider MSCI, said in an Oct 24 talk at Singapore Management University that he expects the event will eventually cause US stocks to drop 18 per cent.

If US tariffs go up significantly on Chinese and Mexican imports, there will be a trade backlash from those countries, which will hurt US consumers addicted to cheap foreign goods. MSCI's models estimate US gross domestic product (GDP) growth will drop three percentage points, which can tip the country into recession, he said. Costs will rise and inflation can go up three percentage points. "Net net, it's a classic stagflation scenario."

Companies sensitive to growth such as financials and industrials will be badly hit, he added. Volatility will rise and the 10-year US Treasury yield could go up one percentage point. European GDP growth could similarly go down 3 per cent, stocks fall by 20 per cent and inflation rise 3 per cent.

"Emerging markets will also not be spared, but on a relative basis they are a little bit more hedged with the rise of India and China. But they are still very dependent on the US and Europe as trading partners," Mr Manghani said.

Market watchers have pointed out, however, that politics matters only to the extent that the president is able to do what he or she promised.

The presidential election is not the only race that will take place on Tuesday. Seats in the law-making US Congress - in the House of Representatives and one-third of the Senate - are also up for grabs. Markets are expecting a split, with the Senate going to the Democrats and the House going to the Republicans. A split will lead to moderate politics, observers say.

Said OCBC economist Wellian Wiranto in an Oct 20 note: "It should be largely good for market sentiment if the Republicans carry the House with just a slim margin, or if the Republicans who are elected are those more in the middle rather than extreme right of the ideological spectrum."

Citi strategists said a Democratic sweep of the presidency, House and Senate will cause US equities to sell off, but this scenario is unlikely given Mr Trump's recent surge.

If there is one thing both candidates agree on, it is the need to boost America's ageing infrastructure. Increased US spending will push up bond yields in the United States and across the world, said Saxo's Mr Van-Petersen. Sectors such as construction, materials, industrials, builders, along with the world's coal, iron ore and steel producers could benefit, he said.

But Aberdeen Asset Management's senior investment manager Andrew Brown remains sceptical on the infrastructure promise.

"I haven't seen elections anywhere where (candidates) haven't been keen, so you wouldn't necessarily hang your hat on that," he said. "The ultimate arbiter for markets in last four to five years has been the Fed."

And where the US Federal Reserve is concerned, a December rate hike is well expected, said DBS Bank analysts in an Oct 31 report. Singapore real estate investment trusts (S-Reits) face a risk of profit-taking, they said. Reits have begun selling off, with the FTSE ST Reit index down 4.3 per cent in two weeks.

Said DBS analysts: "CapitaLand Commercial Trust, Fraser Commercial Trust, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, Suntec Reit, Ascendas India Trust and Parkway Life are Singapore Reits under our coverage that outperformed the Straits Times Index by at least 10 per cent year-to-date and with less than 7 per cent upside to their fundamental target prices."

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