The pollsters have failed again. Two days after voting closed for the 2020 US Presidential Elections, the much-heralded “Blue Wave” turns out to be a Blue Trickle instead. Joe Biden failed to win the toss-up states of Florida and Texas. Overall margins were narrower than expected although at press-time, Biden’s lead has widened to 264-214, according to Associated Press — six shy of the 270 needed to take the White House from Donald Trump.
Democrats hoping to flip the Senate are likely staying disappointed. Needing to flip four Senate seats to capture the Upper House, it has so far made no net gains in their seat count. Furthermore, despite keeping the House, Democrats may see the smallest House majority in two decades as the GOP gained a net six seats.
“The shy Trump-voter emerged in record numbers when it really mattered,” says OCBC’s head of wealth advisory, Kelvin Goh. “They may not have answered calls from pollsters, or they could have outright lied about their political positions when interviewed. But in the silence and security of the ballot box, their true preferences were made known. A tick for President Donald Trump.”
Adding to the drama is the spectre of a contested election. “We are up BIG, but they are trying to STEAL the Election. We will never let them do it. Votes cannot be cast after the Polls are closed!” bellowed a frantic Trump on Twitter, as he made wild accusations of dumped ballots and election fraud. After a bizarre attempt to declare victory prematurely without evidence — a move that left even staunch allies shaking their heads — CNBC reports that Trump made legal challenges in Georgia, Michigan and Pennsylvania to stop vote counts while demanding a recount in Wisconsin due to “irregularities in several Wisconsin Counties”.
We are up BIG, but they are trying to STEAL the Election. We will never let them do it. Votes cannot be cast after the Polls are closed!
They are working hard to make up 500,000 vote advantage in Pennsylvania disappear — ASAP. Likewise, Michigan and others!
“There’s no claim I can think of that would shut down the counting of lawful, valid mail-in ballots in Pennsylvania,” Harvard Law School’s professor Nicholas Stephanopoulos tells The Harvard Gazette, echoing Columbia Law don Caroline Polisi’s assessment in a CNBC quote that the President’s claims “lack merit”. But with the legal proceedings likely to take some time to settle should the polls indicate a Biden win, Fabiana Fedeli, global head of fundamental equities at Robeco, sees volatility dragging out for some time until a clear result emerges.
As such, markets got what they really didn’t want — a lot of uncertainty, says Jim Leaviss, chief investment officer of public fixed income, M&G. This view is shared. “Until we have a clear win, we should expect markets to be volatile and trade on election outcome news,” warns Fedeli. The uncertainty saw investors flee to safe-haven assets like 10-year and 30-year treasuries and German bonds to hedge against volatility. OCBC forex strategist Terence Wu also warns of idiosyncratic US dollar risks arising from the fog of war.
But Mizuho Bank’s Vishnu Varathan, head of economics and strategy, notes that markets are happy to presume their “goldilocks scenario” of a Biden Presidency and Republican Senate as their base case for now. The S&P 500 jumped 2% on Nov 4 in spite of lingering uncertainties of a contested election, with CNBC reporting that Wall Street has chosen to focus on the fact that a Blue Wave has been avoided. Markets hope that a Republican Senate will prevent Biden from raising corporate taxes and implementing additional business regulations.
In any case, Asian markets are also looking forward to a less combative attitude towards trade and US-China relations if Biden wins the White House. Asian markets rallied on Thursday, Nov 5. The Straits Times Index was up 2.74%, the Kuala Lumpur Composite Index was up 2.52%, the Hang Seng Index was up 3.25, while China’s Shanghai Composite Index was up 1.3%.
Andrew Gillan, head of Asia ex-Japan equities at Janus Henderson Investors, expects the conclusion of the polls to encourage more capital flows into Asia’s higher-yielding emerging markets, as money managers may increasingly perceive the US and other developed markets as overpriced. “The US elections might mark a turning point and a chance for investors to reassess these fundamentals. The relative valuations and the economic recovery in Asia would certainly justify that shift,” he tells Reuters.
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Reading the tea leaves
According to Stephane Monier, chief investment officer at Lombard Odier, the likelihood of a Biden Presidency and a Republican Senate is now 60%. But Lombard Odier’s chief economist Samy Chaar is pessimistic about this scenario, warning that the US could see a challenged economic recovery due to the insufficient size of the Republican’s planned US$500 billion ($676 billion) stimulus. In contrast, the Democrats were pushing for a much bigger US$2.2 trillion package, which they could pass under a Blue Wave. Treasury markets, says Chaar, are pricing in a difficult recovery, with US 10-year yields falling 9 base points to 0.766% — its lowest since Oct 18.
Jeffrey Halley, senior market analyst, Asia Pacific, at Oanda, foresees this improving market liquidity by forcing the US Federal Reserve to take on a greater burden for stimulating the market — resulting in stronger US equity markets and a weaker US dollar. But Chaar of Lombard Odier notes that the powers of central banks are limited by their inability to directly inject cash into the real economy. Selena Ling, head of treasury research and treasury, OCBC Bank, is ruling out any big moves during the Nov 5 Federal Open Market Committee meeting, since the central bank will wants to avoid worsening the present election uncertainty.
Now, if Trump wins the election with a Republican Senate — a 25% probability, according to Lombard Odier’s Monier — cuts and deregulation will be the least of investors’ problems as Trump’s “America First” foreign policy continues, says DBS’ senior investment strategist Dylan Cheang. Such an outcome, according to JP Morgan’s Nikolaos Panigirtzoglou, could hurt Asian currencies and Asian shares due to intensified trade and geopolitical tensions. A low-probability Trump win with Democratic Senate would be little different, with the exception of a fiscal deal with the Democrats given Trump’s campaign promise to invest in infrastructure, says Cheang.
Holding the line
Given the uncertainty, Mark Haefele, UBS’ global chief investment officer, is urging investors to stay disciplined and stick to their financial plans. For one, they should capitalise on the market volatility to build up long-term positions and diversify their portfolios in anticipation of potential post-election upsides like the eventual passing of fiscal stimulus and a viable Covid-19 vaccine in 2H2021. Diversification would also help investors hedge against election risks, as would investment in stocks insulated from campaign issues.
“Now is also a time to consider stocks that are relatively insulated from campaign issues. These include companies in communication services; companies with a diverse revenue stream or diversified content; consumer staples; and portions of the IT sector that have remained out of the regulatory spotlight,” says Haefele. Anticipating medium-term greenback weakness, he recommends investors turn to riskier currencies like sterling and the euro for earning opportunities and safer currencies like the Japanese yen and Swiss franc as hedges.
Investing in the post-Covid-19 economy is yet another good bet, says Haefele, who recommends stocks that can disrupt their sectors using technology like 5G, as well as automation and robotics, as supply chains become increasingly “ringfenced”. He does warn investors, however, against pursuing mega-cap tech stocks despite their present strong performance. “We expect the relative laggards of 2020 to lead the next leg higher in 2021. These include US mid-caps, EMU small- and midcaps, the UK, and emerging market value stocks,” he says.
Yet, other analysts believe all the drama and headlines ought to come to naught — and that investors should really look at the fundamental issue instead. “Ultimately, the biggest impediment to the economic outlook is Covid-19, and it is far from resolved, with a resurgence seen in Europe, the US and beyond,” says OCBC’s Goh. “Leave the political prognostications and fixation over the election results to the pundits. Move along now; nothing to see here.
