#Market Strategy — 14.10.2020

Monthly Investment Strategy - October 2020 [VIDEO]

Prashant Bhayani

Stay updated on the global economy and markets every month with insights from our Chief Investment Officer, Asia.

TOPIC THIS MONTH: Do elections matter? Focus on Policy, not Politics 


Welcome to this month's Asian Navigator, October 2020. It won't surprise you, our focus this month, US elections. Focus on policy, not politics.

Firstly, I want to update on the elections themselves. Presidential candidate, Joe Biden, right now is leading in the polls by roughly 9%, as of the middle of September, over President Donald Trump. What's interesting, relative to 2016, is his polling numbers have been relatively steady, unlike Hillary Clinton who fluctuated before the elections. Secondly, the number of undecided voters in the last election was 26%. It is estimated, this time, it's a lower number, perhaps closer to 10 to 15%, as both candidates are relatively well-known.

The next critical question is, what if this is a contested election? First of all, it's not unprecedented. In the year 2000, President Bush and Al Gore had a contested election, which was delayed by about 34 days. And the S&P had a moderate drop of about 4%. What do we think this time? Clearly, mail-in votes, which is a key issue, are going to be higher than prior elections. In the last election it was 20%. Hence, there is the potential, if the polls narrow ahead of the election, that in some of the swing States there could be a recount issue. But importantly, what's priced in? The volatility curve, or the VIX, already is elevated through January. And it's important to know that this could be an opportunity as we head into the elections. You should focus on what's priced in, not just the risks.

The next area we want to focus on is, what are the policy differences between Biden and Trump? There are three areas with the Biden presidency. Firstly, the corporate tax will go up from 21 to 28%. That would fund a carbon neutral economy by 2050, two trillion of spending. And thirdly, the minimum wage would go up to $15 an hour, boosting consumption.

So finally, what are the policy outcomes of this election on markets across asset class? So firstly, if we get a Biden blue wave and a sweep in Congress, expect more fiscal spending that benefits infrastructure, and cyclical sectors as well as consumption. You will expect bond yields to rise with economic recovery and greater deficits, and also the dollar to weaken in sympathy. If we get a split Congress, whether it's President Trump or a President Biden, infrastructure still benefits under both outcomes. We also would expect in the medium term for bond yields to rise and the dollar to weaken with the fiscal stimulus and economic recovery in 2021.

Have fun watching the elections. Thank you very much.

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