US Election: Summary of Key Policies and the Impact on Portfolios

03 November 2016 by Simon McConnell

Tuesday 8th November will see US citizens take to the polls to elect the 45th President of the United States of America - an event that potentially could have a significant market impact. Nevertheless, based on our assessment of the balance of risks and current polls, we feel that current positioning is appropriate as we approach election day.

Media coverage of the political jousting concerning personalities and several key electoral topics that has occurred over the past few months has been abundant, yet focus on key policies has been thin to say the least. The table below summarises key policies for each candidate that we think will have a tangible impact on financial assets, and hence clients' portfolio performance.


Summary of Policies of the Two Leading Presidential Candidates


Donald J. Trump Hillary Clinton
Economy and Jobs
  • Aim to create 25m jobs over the next decade through reform in tax, trade, energy and regulatory policies.
  • Tax cuts for all, the greatest deduction for working and middle class taxpayers.
  • Lower the business tax rate to 15% (from 35%).
  • Eliminate the carried interest loophole for Wall Street and the estate tax.
  • Eliminate intrusive 'job-killing regulation.'
  • Reduce non-defence, non-safety net spending by one percent of the previous year's total each year.
  • Increase scrutiny on the Federal Reserve.
  • Implement a fair tax system: enforce tax code changes to enable the closure of corporate and Wall Street tax loopholes, impose an exit tax on firms leaving the US and reward firms for domestic investment, implement tax cuts for small businesses and offer tax relief to working families.
  • Commit £275bn to widespread infrastructure investment to unlock economic opportunity.
  • Provide a $10bn investment to the US manufacturing sector.
  • Cut red tape, provide tax relief and expand access to capital for small businesses.
  • Rewrite the rules so that more companies share profits with employees - and fewer firms move profits and jobs overseas.
  • Raise the minimum wage and strengthen overtime rules.
  • Impose a risk fee on large banks, hold senior bankers personally accountable for major losses and implement a tax on high frequency trading.
Trade
  • Ensure that every trade agreement increases GDP growth rate, reduces trade deficit, and strengthens manufacturing base.
  • Reject the Trans-Pacific Partnership (TPP).
  • Renegotiate North American Free Trade Agreement (NAFTA) to improve the terms for American workers.
  • Label China as a currency manipulator and escalate trade disputes with them.
  • Pursue smarter, fairer, tougher trade policies that put U.S. job creation first and get tough on nations like China that seek to prosper at the expense of our workers. This includes opposing trade deals like the Trans-Pacific Partnership (TPP).
Health
  • Repeal and replace the Affordable Care Act (“Obamacare”) with Health Savings Accounts.
  • Fight attempts to repeal the Affordable Care Act (“Obamacare”) and the privatisation of Medicare.
Energy
  • Create energy independence for the US and become the dominant global producer. Scrap the Clean Power Plan.
  • Establish the US as the clean energy superpower of the world.

The past week has seen a dramatic reversal of the previous months' growing conviction of a strong Clinton victory. As things currently stand, at Netwealth we imagine that there could be a small 'relief rally' in US assets if Clinton were to be elected, reversing negative market moves, which have reflected less certainty in polls. The impact of promised higher wages and lower taxes on consumers' discretionary spending will be factored in to our equity market analysis, whilst increases to investment in manufacturing and infrastructure will be important drivers of the inflationary outlook going forward.

On the other hand, if there were a Democratic clean sweep (winning the Presidency and regaining control of the House and the Senate), then in subsequent weeks the market may have a more longstanding, positive reassessment of US assets. This is because a clean sweep could empower Clinton to boost infrastructure spending and push through budgetary change and tax reform; also she is likely to be more aggressive on foreign policy, particularly regarding North Korea. Such a phenomenon occurred during the first two years of the Barack Obama and Bill Clinton presidency, and over the last week President Obama has indicated how important this is in terms of the effective implementation of policy.

Conversely, in the less likely event that Trump is elected, we perceive his protectionist attitude a risk for economies with high exports to the US, due to the likelihood that trade volumes would diminish. For example, the Mexican Peso has been trading as a bellwether for Trump support throughout the campaign and we think MXN and EM currencies in general could come under sustained pressure if he were elected.


Source: Bloomberg


For the reasons given above and also in light of the recent strong performance of the US equity market, we've taken some profits ahead of the election, although importantly the dollar remains our largest foreign currency exposure. We continue to monitor the political implications and have identified scenarios in which we would make further changes to our strategy. However, barring any surprise over the coming week we are comfortable that our current positioning is appropriate as we approach election day. In subsequent months, we believe that the market will refocus on the monetary policy outlook in the US in the run up to the Federal Open Market Committee meeting in December, when we currently expect another cautious increase of the cash rate - regardless of who is the next President.

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