Investors have grown more concerned over the potential “tail risks” posed by this year’s US presidential election than the global trade war, underscoring the importance of America’s public policy with global markets sitting at record peaks.
A survey of fund managers by Bank of America, released on Tuesday, showed concerns over global trade have fallen to second-place on investors’ list of potential events that could unsettle markets. Trade fears had dominated for each month since mid-2018, barring one in which concerns of a China slowdown took hold.
The sharpening focus among the 202 asset managers with $630bn in funds under management on the US election comes as campaigning is entering a crucial phase, with polling day now less than 10 months away. Impeachment proceedings, triggered by Democrats in the House of Representatives, are also set to begin later on Tuesday in the Senate.
“While there are no obvious signs of election-related effects on economic activity so far in this election cycle, there is some concern that election-related uncertainty could have a more noticeable effect on sentiment and activity as the election approaches,” Jan Hatzius, Goldman Sachs chief US economist, said earlier this month.
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Mr Hatzius’s analysis showed that while the direct economic effects on the US economy are generally muted, the uncertainty that takes hold during the campaign can have indirect effects.
“Increased uncertainty weighs on growth, suggesting that the upcoming election might pose modest downside risks for growth and investment,” said Mr Hatzius in a research note sent to the bank’s clients.
Typically election uncertainty spikes during January and March — the key nomination period — and then again as election approaches in September and October, Mr Hatzius said.
BlackRock, the world’s biggest money manager, late last year reduced its rating on US equities to “neutral”, having previously suggested investors overweight the asset class in their portfolios, saying: “Rising uncertainty around the 2020 election and a wide range of potential policy outcomes may weigh on sentiment”.
US stocks have rallied to record highs during 2020, having soared by almost 30 per cent in 2019. Strength in the US economy and an easing in concerns over global trade led by an improvement in relations between Washington and Beijing have played a key role in Wall Street’s performance.
However, the election outcome could prompt significant policy changes with ramifications for the economy and the markets.
“US politics will be the main source of volatility as we head toward the 2020 US presidential election in November,” said Sonal Desai, chief investment officer for fixed income at Franklin Templeton, a fund manager.
“Some of the leading Democratic contenders have policy platforms that echo the Obama presidency, while others have put forward proposals that would fundamentally alter the business environment with a likely severe negative impact on growth and markets.”
She noted, however, that, “a second term for Donald Trump would most likely involve a continuation of the policy-by-tweet pattern that has already proved disruptive in terms of market volatility and business investment uncertainty.”
