The HSBC report (dated 24 July, has a copy) is devoted to what may happen with the markets of bonds, shares and currencies after 8 November, when the U.S. presidential election. In its review of investment strategies with different variants of development of events HSBC allocates four scenarios.
All the old
The first scenario (status quo) assumes the victory in the presidential election of the democratic candidate (de facto they have become Hillary Clinton), despite the fact that in Congress the Democrats can’t get a majority.
For investors who invest in securities with a fixed income, maintaining the status quo, according to HSBC, is the most preferred outcome. Significant changes under this scenario are expected on the market. Such a favorable outcome would be for sovereign bonds of emerging markets.
The foreign exchange market in the case of maintaining the status quo will demonstrate traditional immunity to American political developments, the authors of the report.
Save the current alignment of forces in American politics after the elections will have little effect on stock prices of American companies — economists expect the HSBC, they only slightly reduced.
The second scenario involves winning the presidential election Hillary Clinton plus democratic majority in the Congress (now both chambers are under Republican control).
In this case, HSBC is considering the scenario of the so-called big government (increasing role of government in the economy). In this scenario, the effect on us bonds (in particular, the 10-year Treasury securities Treasuries) will be limited. The scenario assumes that the fed will continue to signal its intention to tighten monetary policy. This development will contribute to the outflows from emerging market bond (such as Mexico). But for bonds of countries such as Indonesia or Brazil (where is the “positive reforms”), the script will be more favorable.
The impact of the second scenario on the currency market will be modest: the dollar could strengthen somewhat, increase the rate of Mexican peso (sensitive to statements Donald trump about building a wall on the border with Mexico and the possible introduction of trade barriers). “For the currency market the Clinton presidency means continuity of policy,” the report said.
The increase in budgetary expenses and GDP growth can lead to the fact that stock returns of us companies, especially in the consumer sector, a few will grow. However, according to analysts at HSBC, this effect will be fully offset by tighter monetary policy of the fed, which will lead to a slight drop in the stock price of U.S. companies in comparison with the scenario “status quo”.
A Moderate Tramp
The third scenario involves a victory on elections of the candidate-the Republican (trump) and the “Republican” Congress, but with preservation of traditional (mainstream) conservative agenda.
If the President becomes trump, the market will need time in order to understand whether a Republican to implement the most populist points of his election program, or to maintain a moderately conservative policy. The immediate effect of the victory trump may be the depreciation of the Mexican peso and Chinese yuan (since trade relations of the USA with Mexico and China may deteriorate), as well as the growth rate of the Japanese yen and the gold price, which will be considered by investors as a safe haven. According to HSBC, even a slight manifestation of a “trade war” in U.S. policy if trump could adversely affect the U.S. dollar exchange rate.
If trump became President, will adhere to a moderate policy, stock returns of us companies will increase (trump is going to reduce the tax burden), but in the future the price will fall.
Market securities fixed income presidency trump even with a moderately conservative policy would mean a drop in prices of sovereign bonds of emerging markets — the main impact will be in Mexican bonds, and the bonds of the countries having close trade relations with the United States.
In the implementation of the fourth scenario is a Republican President and Congress will conduct a series of populist measures (in particular, significantly reduce tax rates), which may lead to stagflation and a surge in sentiment of uncertainty in the market.
If trump will implement populist policies, according to economists at HSBC, us stocks and the dollar lose its investment image of the quiet harbour. The Bank expects the downturn in the US and selling American investors assets. The dollar in this case, waiting for the weakening (trump, most likely, will consider the weak U.S. dollar exchange rate as a means to combat the negative trade balance of the United States). Following the weakening of the dollar, according to the authors of the report expect the depreciation of the Asian currencies especially the Chinese yuan. The leader of the fall in the foreign exchange market will be the Mexican peso.
According to HSBC, “populist” scenario is the most negative for the shares of transnational corporations in the context of possible shocks to world trade, the slowdown of the global economy and uncertainty in the markets. In such a situation, stocks of companies with relatively closed markets of the emerging economies will be in a relatively better situation than the shares of multinational companies of developed countries.