US Elections: Financial Markets and Fiscal Shock
Which assets would see a significant change in their valuation if Donald Trump wins the US presidential election in November? The main driver would be an appreciation of the US dollar, which would affect several markets. In the bond segment, short-term US sovereign rates would not be affected, unlike 10- and 30-year rates, resulting in a steepening of the yield curve of 20 to 50 basis points on 2-10-year bonds and 35 to 50 basis points on 2-30-year bonds. Finally, the non-speculative credit market would see a decline in its yield premium on sovereign bonds and/or a widening of the spread (risk) on this same market in the event of a confirmed recessionary risk. In the equity segment, US stocks exposed to foreign trade would be affected with a 5% price correction due to a weakening of their price competitiveness. In this sense, small and mid-cap stocks, which are more exposed to the domestic market and therefore to the rise of the dollar, could outperform large caps by an average of 6%. Emerging markets, affected by a depreciation of their currencies against the US dollar and potential protectionist measures, could correct by 10%. Mexico and China would be the markets most affected by currency risk, unlike Russia, which would benefit from a possible easing of sanctions, for example.
From a sector perspective, any cyclical company exposed to potential infrastructure spending by either US presidential candidate would be a winner (Donald Trump would double spending, while Hillary Clinton would spend $50 billion per year over five years). On this subject, there seems to be unanimous agreement on the benefits of a public spending stimulus, as Larry Summers explains for four reasons. (1) In the United States, the share of gross fixed capital investment by the government as a percentage of GDP has fallen below 3.5%, compared with 4.5% in 2010, 4.0% in 2000, 5.0% in 1990, and 7.0% in 1960. This is the lowest level in 60 years. (2) Net capital accumulation by the government increased by 0.7%, compared with an average of 1.5% between 2000 and 2010. (3) Financial conditions remain favorable for such projects, offering low borrowing rates and a better return on investment. (4) The public deficit has stabilized at 4%, compared with peaks of 10% in recent years. One of the available estimates, measuring the impact on US GDP of a $100 billion annual increase in spending over five years, indicates that the output gap would increase by 0.5 points, the unemployment rate would fall by 0.3 points, and inflation would accelerate, leading the Fed to raise its key interest rate by 25 to 50 basis points before normalization. Fiscal stimulus would therefore reverse the trend in R star, the famous low natural interest rate resulting from a slowdown in potential GDP in the United States over the past decade, which is slowing the Fed’s normalization of its key rate.
