This is Part I of a mini-series that looks at the US Presidential Elections. Part II will consider the policy trends of a second Trump administration or the alternative Biden administration and its relevance for markets.
We had been concerned about the US presidential elections coming into this year, describing them somewhat facetiously as an “EM election with a reserve currency”. From past research, we understand how narrow, polarized and disputed elections in emerging markets (EM) reverberate in asset prices. However, we have no such past experience with similar events in an economy with a reserve currency and the deepest of capital markets. In short, the downside risks are far more numerous than any possible upside policy surprises.
Recent social unrest in the United States (US) illustrates the potential for tail risk outcomes. Investors are rightly beginning to re-examine the impact of the upcoming election. Pre-pandemic surveys of international investors had showed majorities in excess of 80% believing that President Donald Trump would sail toward re-election, even as betting markets had ranked his odds around 60%. Our own fundamental analysis had put it closer to a coin toss back in February. The economic shock now lowers those re-election prospects dramatically.