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#Market Strategy — 09.10.2018

Investment Outook, October 2018

Prashant Bhayani

US Mid-term Elections: Risk or Opportunity For Asian Markets?

VIDEO TRANSCRIPT

Hello. Welcome to this month's strategy navigator for Asia. Undoubtedly, on many investor's minds are the upcoming US mid-term elections. What's the implications for global markets? What're the implications for Asia?

Firstly, one of our scenarios. Given current polls and history, historically, the incumbent party normally loses seats in the mid-term elections firstly. Only in 1934 and 2002 did the President's party gain seats in the House and the Senate.

Hence, our base case is that there is gridlock, i.e. the House is won by the Democrats and the Senate is retained by the Republicans. What does that mean in terms of policy?

It means less tax reform, less policy deregulation, and perhaps less hawkishness on trade, but that's likely to still continue from the President himself. In terms of the dollar, it could mean moderately negative dollar, moderately positive for the US equity market, and for Asia, moderately positive as well with less pressure on the dollar as well.

Furthermore, what if the Republicans sweep again the House and the Senate? Clearly, that means more trade hawkishness. It means more likely tax cuts, and also that means a stronger dollar.

That would be negative for Asian equities with the hawkishness and stronger dollar putting pressure. It also would mean likely a further rally in US equities before inevitable correction from overheating.

Finally, what if the Democrats sweep? Then, you're going to have a very adversarial relationship between President Trump and the Congress. Historically, that means weaker dollar.

That's positive for Asian equities, but also means less tax reform, virtually none, also much lower levels of policy deregulation. Hence, we would expect US equities to be weaker in that scenario along with the dollar.

Those are the scenarios we currently see at this point. We would use this as a guide point in thinking about how to frame your investments.

Our allocations won't change simply on the basis of the election. We'll wait to see the results because other things also drive markets. So, keep in mind that dichotomy, but it is an important event. Thank you.