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Citi

High Costs of Waiting Amid Election Uncertainties

  • Polling data show President Trump’s odds of retaining the presidency could make his victory in 2020 more surprising than 2016. Former Vice President Biden retains a 9.0% poll lead nationally (as of 25 October, based on the average of national general election polls), a stronger lead than Hillary Clinton’s at this time in 2016. Equity implied volatility for the period just after the US election has fallen, indicating markets no longer anticipate a protracted battle to determine who is President. If President Trump pulls off another surprise victory, he is likely to preside over a divided government with Democratic control of the US House of Representatives.

 

Uncertainties from the US election

  • If Former Vice President Biden wins a decisive popular vote and the Electoral College, his ability to govern domestically could depend on the control of the Senate. If the Senate does not change hands, he is unlikely to be able to create vastly new domestic tax and spending initiatives in his first two years at minimum.

 

  • Looking internationally, there is a marked contrast between both candidates’ approach to trade and tariffs. Thus, US trade policy uncertainty measures have reduced while tax policy uncertainty has surged. Further, Citi analysts think that the election uncertainty may have caused many to cover short positions in the USD. A Trump surprise victory could see a further rally in USD while a Blue Wave sweep (Biden plus Democrats winning the Senate) could reinforce this year’s structurally driven drop.

 

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The high cost of waiting

  • Global investors have behaved tentatively before recent elections. Tentativeness – fear of policy uncertainty – abated only after the election uncertainty has lifted. Yet, looking back, global equity fund inflows have followed each of the prior four US elections. When contemplating adding to portfolios, investors may assign greater anxiety to the fear that a decision to invest today may be poorly timed and suffer immediate losses. However, waiting is an expensive behavior. When markets were in turmoil earlier this year due to the COVID-19’s large exogenous shock, missing the two best days of 2020 could have reduced an investor’s return in US shares by 19.3%.

 

2021 and 2022 could see a period of strong economic growth and market performance

  • Markets are likely to be driven by a recovery in depressed industries and a consolidation of gains for sectors that have already boomed. The four reasons are 1) highly likely viable and available vaccines; 2) a rebound in trade and industrial production; 3) pent up demand for services; and 4) fiscal stimulus globally. With the US Federal Reserve is likely to keep shorter-term interest rates atypically low for years to come, higher equity allocations are preferred as bonds may provide fewer diversification benefits. Thus, Citi’s Global Investment Committee is overweight global equities, and underweight global fixed income and cash.

 

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