Trump v Kamala: What a win for either party will mean for markets

Jacob Mitchell: We think about macro as being integrated right across the process. It's a toolkit that we can use in a holistic way, so that means our sector teams are picking stocks from the bottom-up using quant factors to screen the universe. We're also thinking about, from a portfolio construction point of you, as we're building that portfolio, what tilts are we building into it? Do we think we're being compensated for risks in certain areas, whether they're factor risks, region risks, or sector risks? And then finally, it's really also just determining where tail risks are emerging and if the left tail or the right tail is starting to fatten out, how do we protect the portfolio on the left and then on the right, how do we potentially capture more alpha?

Arvid Streimann: I think it's fairly similar. We look at both top-down and bottom-up. They're both part of our investment process. But when we're thinking about macro, we actually have two ways that we think about analysing macro risk. The first is we're looking for event risk, and that could be something like what's the risk that there's going to be some attacks on some Middle Eastern energy oil infrastructure which sends oil prices sky high and maybe creates a recession. That would be something like an event risk that we look at from a macro perspective. 

The second type of risk that we are thinking about in macro is trend identification. I think a very obvious one to talk about is the ageing population. So we think about these macro risks. It's a core part of what we're doing with our investment philosophy, but I always tell people we're not a macro hedge fund here. We're invested in stocks. And that's why the bottom-up is really important as well.

Why do we rely on betting markets for US election predictions? 

Arvid Streimann: I think that we're always trying to figure out what's the likelihood of each candidate winning and you can't measure it explicitly. So, let's look at betting markets. You can also look at professional forecasters. And when we are thinking about how accurate those betting markets can be, I think that you just have to look back to the 2016 election where one of the big betting houses actually paid out on Hillary Clinton, who didn't win. They paid out on her early and then they had to go and pay out the people who'd bet on Donald Trump. So, I think you look at it and you go, okay, it's interesting. It's a source of information, but I wouldn't say that it's something that you would bet the house on and you have to take it with a grain of salt.

Ally Selby: Jacob, do you feel like there's any problem with us relying so heavily on betting markets?

Jacob Mitchell: Yeah, definitely. I think a betting market is no different to looking at polls as Arvin said, or focus groups, as they really are just impacted by sentiment and so they can get it wrong - just as the polls can get it wrong. I think what matters more is just understanding the economy in terms of the outcome of the election, or it's probably more related to what's going on in the economy and the degree of social cohesion. And obviously, that's in pretty short supply at the moment in the US. 

Ally Selby: How have elections impacted the economy in the past? Is there any data that supports one party winning or the other and how that impacts markets and the economy?

Jacob Mitchell: It's really interesting. The data over a long, long period of time in the US shows that in the year following the election, returns are noticeably lower than in a normal year and also the chances of a recession happening are much higher. It's obviously linked also to whether the incumbent wins. So, be wary if there's a change of government, the chances of a recession happening are also higher. 

Arvid Streimann: If you go back to the 2016 election when Donald Trump won, one of the big things that he did was implement this tax cut and jobs act, which had a lot of corporate tax cuts in it. And so the US corporate tax rate went from 35% down to 21%, and that tax cut in and of itself increased post-tax profits by about 22%, so just over 20%. And all else being equal, that increased valuations by about 20% as well. 

So, I'd say that what the new government does is very important - which goes to the policies that they introduce. If you go back to the Biden administration, they introduced the Inflation Reduction Act and threw about US$400 billion at clean energy. So, maybe it doesn't have such a big impact on the overall market as much as the corporate tax increase, but if you are sitting there and you're receiving a lot of cash, then your business is actually doing quite well.

What would a Trump win mean for markets?

Ally Selby: I want you to take out your crystal ball, and look into the future. What would a Trump second term mean for the macro forces in markets?

Arvid Streimann: I think that a Trump administration - if he were to win - would actually be quite positive for markets, but it depends on how positive it is. And it depends on whether the Republican party, of which he's a part of, actually wins control of the Congress. So, that's the House of Representatives in the Senate because if that party does get full control of government, then they can do a lot more in terms of legislative change, introducing new laws. 

I think that a Trump administration would be pro-growth. So, it would be good for earnings in an overall setting, but that would push up inflation, which also pushes up interest rates a little bit. We know that he's going to have some stern conversations with China as well.

I think that he's going to be erratic, but when he first became president, people didn't quite know how erratic he was going to be, so it was a bit of a surprise. Now, I think we're all expecting it, so if he's erratic, maybe it has less of an impact on markets, but overall I think that he'd be relatively good for markets.

Jacob Mitchell: We would say markets generally like continuity and the Democrats have introduced a lot of pro-investment legislation. Biden was quite proactive. The Inflation Reduction Act and The Chip Act are two examples. The range of outcomes or uncertainty under a Trump transition, if you like, to a new regime, would go up and in the medium term, I think that would be negative for growth. I think in the short term, I'd agree with Arvid, that the sugar rush response from the market will be a rerun of tax cuts. The only problem with that is the starting point deficit is larger. The starting point of government debt to GDP is larger, as is the underlying inflation rate, and I would argue the sensitivity of the economy to inflation is higher too. 

So, I think you'd give it back pretty quickly with a higher 10-year yield and then there would be question marks around fiscal sustainability and that wouldn't be good for markets. And then on top of that, I think China has also seen Trump Mark I, so they're in a much stronger position having preserved their government position and not overstimulated during covid. They have a lot of fiscal flexibility that the US doesn't have. And so I think they see it coming, they're starting to stimulate, they're being quite modest, but they can certainly ramp that up in the face of tariffs.

Stocks that would benefit from a Trump second-term

Arvid Streimann: I think that he's shown a couple of things. The first is that he's very pro-energy supply, so increasing the supply of fossil fuels into the American economy. And so I think that big oil as a sector would do quite well with him - because I think that he would actually reduce the restrictions and engage in permitting reform, which would allow them to pump more oil essentially. So I think that those types of companies would do quite well.

Another area that I think would do quite well is companies that are exposed to the decoupling or the onshoring or reshoring trend, which I think would accelerate under Donald Trump. And so if we're thinking about what might happen there, if stuff has to be built in America, then I think that maybe factories have to be built. So companies like Caterpillar (NYSE: CAT) that build heavy equipment that can build these types of factories and supporting infrastructure, I think maybe they could do quite well if there is a re-acceleration or an acceleration in the onshoring trend.

What would a Kamala win mean for markets?

Jacob Mitchell: I think that would be the go-to, but look, quite frankly... the chance of dovish rate cuts is probably higher. And so the softer landing beneficiaries - so parts of the financials, definitely the green energy trade to the extent that it's not over-hyped, but I would say you'd be leaning towards stocks that are going to be doing well in a lower rate environment.

Arvid Streimann: I think she's shown, as you pointed out, a clear preference for companies that are involved in the green transition or supporting the green transition. So, I think that's a fertile place to look. I also think, consistent with what I said earlier, that she's engaging in or she would like to engage in, wealth redistribution. I think that she's quite progressive on this. So, I think that it's a bit like a Robin Hood strategy - take from the rich and give to the poor. And so I think those companies that are more exposed to the lower income consumers and we certainly have some retailers that cater to that cohort of households, like the Dollar Generals (NYSE: DG) might do a little bit better in some relative sense and maybe also in an absolute sense. I think that these are the types of things that are quite important to her.

Who will win the US election? 

Arvid Streimann: I think Donald Trump is going to win here. And we've been saying this internally for quite a while. We've put about a 55% probability on that. And when Joe Biden was still running as the Democrat candidate, we had Donald Trump at about 70%. And the reason is that the incumbents are at a bit of a disadvantage in elections at the moment. Particularly given what we've seen with inflation - because what inflation's done is really reduce households and people's purchasing power, which really goes to their standard of living. 

I think people are quite upset about that. And even though the inflation rate has come back down, the price levels are still quite high. It's not like inflation rates have gone negative and price levels have recovered back to where they were. So, I think that people's standard of living has suffered, and I think you can see this in consumer sentiment, you can also see this in the way that a lot of incumbent governments have recently been finding it quite tough to get reelected during this inflation period. 

So, I think this is one of the main reasons or one of the main things that Donald Trump has in his back pocket, so to speak. It's one of the tailwinds he has. When we think about Kamala Harris, she's obviously playing a small target strategy. I think she's waiting for Donald Trump to blow himself up and then she'll sort of sweep in a bit like Stephen Bradbury. But I think that what she's not doing, is giving people hope. And I think that when you look back to what Obama did with his, 'Yes, we can' type messaging, I think that that gave people a lot of hope about what could happen in a very positive sense if he was to be elected as president. And I'm not sure that Kamala Harris has done that. So I think that Trump is ahead at the moment

Jacob Mitchell: Trump. I think Arvid summarised it pretty well. And I think the chances of a clean sweep are fairly high. It's inflation. I think it's not winning in certain key demographics where the Democrat message is just not cutting through. And there's a lot of anxiousness. In the US system, because of the college votes system, you have to win in individual states. And quite frankly, the US system is quite polarised. You could almost say gerrymandered. And so you have deep blue states, deep red states, and then there's a few that matter in terms of the final outcome. Those states, which tend to be traditionally Democrat states, are slowly becoming more Republican. And the key controversy or the key issue is the rate of immigration, whether it's legal or illegal. I think in those battleground issues, the Democrats are losing.