By Peter Garner, head of equity strategy at Saxo Bank
What can we say about equities and the US election? It is very easy or very difficult to predict what is going to happen. If we step back for a minute looking at all the various research on this topic it’s very clear that there are no significant statistics on what will happen with the US equity market depending on who wins the US Presidential elections. What’s more important is that whether we have a divided congress or a clear congress it doesn’t even have any statistical significance. Is this just noise or what is it?
I think if we look at a few points on the U S election there are some things that we can tell. Right now, it looks like Clinton will win the election based on the majority of the polls – at least this is what everyone is expecting right now. You can see that from very big underperformance of healthcare stocks it’s quite clear that the Democratic party is very negative towards the healthcare sector – they want to drop prices, even though it’s going to be tough. But what we can see is that as Hillary Clinton has gone up in the polls we have seen more and more under performance in healthcare stocks. If we get a Democratic White House and Senate majority, which is quite likely, and they get more seats in the House of Representatives, then that will likely pave a way for a more harsh stance against healthcare and I think in the short term we will see more negative sentiment towards the healthcare sector. The best way to play this is through the sector ETFs.
If we look at the S&P 500, our view is if we get a Trump victory that will be the biggest surprise, it will be the unthinkable based on where the consensus is right now. We think it could be very negative in the short term for equities. A look at the medium term – if Trump succeeds by doing his big corporate tax reform, that would be a big boost to equities in our view. If Clinton wins, we get more of the same, the establishment, we know her policies - we don’t think it will have any material impact on equities in the short term. A little bit more medium term, we know she wants to introduce the Buffett rule where she will impose higher tax rates across many brackets in the higher incomes. That could be negative for investor sentiment in the medium term which might spill into negative investor sentiment.
Financials is also a very interesting sector to watch during this election. We know that the Democratic party has a much harder stance towards the Finance sector – they want to do more regulation, so if it becomes a Clinton victory, we think that could spill some more negative sentiment for this sector. Obviously, that could be off-set by the Fed which we are expecting to hike rates in December and probably also doing a couple more rate hikes if the economy continues to improve in 2017. The effect might not be as big as it could potentially have been, but nevertheless in the short term we think it could be negative for financials. If also Clinton wins, we know that the capital goods sector might stand to win because the Democratic party with Hillary Clinton has a campaign platform that wants to add $275 billion into infrastructure investments through a corporate tax reform. That would be positive for the sector that delivers machinery, equipment to build new roads, highways, subways and other infrastructure projects.
Our final idea on the way to play the equity market is to set your equity portfolio up for the unthinkable. So if Trump wins, what’s the best way to play this in the market? There are several ways. You could either buy a put option of the S&P 500 – they are still not very expensive; I think you pay around 2.5% premium for a January or February expiry. I think that’s a decent premium to pay for a potential larger setback in equities should Trump win.
Another one is playing the Mexican equity market. Mexican equities have done tremendously well in local currencies but in US dollar terms they’ve not done so well over the past couple of years. They are very negatively correlated to a Trump win – if Trump wins we know it’s going to be bad for the Mexican peso, he wants to renegotiate the NAFTA - and it’s likely going to be negative in terms of sentiment for the Mexican equity markets. The best way to play that is through the country ETF which you can find in the SaxoTrader platform by typing in “Mexico ETF”. That’s the best way to get access to this equity market.
