Clinton relief vs Trump scare: What US elections results will mean for investors

Clinton might not do anything impeding US growth. Trump could

Everyone will be watching the US presidential elections with bated breath. Hillary Clinton is a known quantity and has a habit of making detailed policy statements. Donald Trump is an entirely unknown quantity. He specialises in sweeping statements and often contradicts himself in successive sentences. His record in business does not inspire confidence, given multiple bankruptcies and over 3,000 lawsuits.

Both will probably indulge in deficit financing, with America’s federal deficit rising as a result. However, Trump’s tax plans (insofar as he has detailed these) would result in much larger deficits. The two have diametrically opposed views on immigration and on other federal programmes, such as health care. Their foreign policy objectives are also wildly at variance. 

Rhetoric aside, most companies in major sectors, especially banking, financial services and insurance (BFSI) will wait until the elections are over before outlining future plans. Also, it’s not only a question of clearly outlined policies from the White House. Those plans, whatever they are, have to be ratified by the legislature and there are concurrent elections to the US Senate (in 33 of 100 seats) and the House of Representatives (all 435 seats).

If either candidate is elected, and the same party ends up controlling both Houses, passing legislation would be much easier. The Republicans hold a majority in both Houses and that has impeded Democrat President Obama’s ability to pass legislation. If Trump can make it and the Republicans hold on to both Houses, that could be a game changer. 

Similarly, if Clinton comes in on a big wave, she might swing one or both the Houses. The House of Representatives is much more difficult for the Democrats to win because the last delimitation of constituencies suited Republicans. Gerrymandering like this is normal everywhere — there are classic maths puzzles that demonstrate how constituencies might be redrawn to suit a party.

The US President obviously has enormous influence over the global economy. American foreign policy decisions also swing geopolitics. US relations with Russia, Iran and Saudi Arabia directly impact energy prices. Escalation of tensions could cause market panic and there are US involvements in West Asia, in Afghanistan and Pakistan and alliances in multiple places. Again, Clinton is a known quantity and Trump is not.

Global markets are likely to see volatility until the election results. The Indian information technology (IT) sector will be on tenterhooks. Roughly, 70 per cent of US IT service needs are met by Indian firms and their largest clients are from American BFSI companies. Visa quotas are a serious issue. The Obama administration hiked visa fees but Trump has flip-flopped on visa policy and also proposed a tax on outsourcing. Another Indian sector which depends heavily on exports to America is pharmaceuticals and changes in health care programmes could impact it.

Exporters will be looking at tariff and non-tariff barriers if Trump follows through on protectionist rhetoric. This will affect China more than India but India does lead in certain areas such as cars in which Trump has proposed a 35 per cent import duty.

There could be a relief rally if Clinton wins and there might be a sharp fall if Trump wins. These effects would be temporary. Whatever policy changes the new President does implement will, however, have long-term effects.

Also, the Federal Reserve is apolitical but has maintained status quo ahead of elections. Expectations are that the policy rate will be hiked in December, regardless of who wins. The US economy has surprised on the upside with strong growth in gross domestic product and there have been steady employment gains. The Federal Reserve will act in December to ensure there is no overheating. A rate increase would have a bearish effect on global markets leading to hardening of the dollar.

This election presents investors with a sad situation regardless of who wins. A Trump victory would lead to losses across most financial markets and the long-term impact on some Indian sectors may be negative. A Clinton victory would probably lead to a relief rally, followed by status quo for Indian corporates. At best, one can say the US economy is growing, and Clinton is unlikely to do anything drastic. Trump might.