US election: A premium on patience
“Your patience is commendable,” Joe Biden told American voters earlier this morning. The US Democratic presidential candidate could just as easily have been addressing global investors.
The 2020 US race for the White House is unfortunately not quite over yet, denying markets the early clarity for which they have yearned on what is widely seen as the most important election in a generation, set against the unprecedented backdrop of a pandemic.
As at the time of writing, the outcome remains on a knife-edge: the incumbent, Donald Trump, and his challenger are neck-and-neck in crucial battleground states. We can say at this stage, though, that Trump has yet again outperformed the polls.
Markets are gyrating as the situation develops, reacting to each new electoral development. Over the near term, uncertainty is likely to weigh on risky asset classes. We would make the following observations regarding US markets:
• Treasuries: Rising virus infections do not mix well with political inaction. And if this lack of clarity persists, we would anticipate lower yields as investors seek high-quality assets in a flight to safety. This also unwinds some of the move higher in yields we recently witnessed on the hope of a large Democratic fiscal package.
• The dollar: The greenback is also likely to be supported by the flight to safety as well as the reduced chance of near-term US fiscal spending.
• Equities: We expect risk assets like stocks to be undermined by the uncertainty.
• Credit: Credit could also suffer, albeit to a lesser degree than equities thanks to explicit support from central banks.
Of course, the market outlook will likely shift quickly once the result has been finalised – both with regard to the White House and the US Senate.
Beyond individual asset classes, and the important question of near-term fiscal stimulus, the eventual outcome will also have important implications for broad investment themes, not least the global energy transition and impact of populism on our politics.
Particular issues we would highlight here are relations with China, against which the Trump administration has bumped since taking office, and the landmark Paris climate accord, from which Washington has withdrawn.
And the context of COVID-19 is critical over the longer term, with the successful rollout of a vaccine pivotal to a return to something approaching normality.
Investing in an age of uncertainty
Even though the lack of immediate clarity is frustrating, it also reflects the broader age of uncertainty in which we live. Market participants will need to hold their nerve over the coming hours and days, with a clear premium on patience.
But it is worth remembering that regardless of the outcome and the positions taken by politicians, investors also have an important role to play on key environmental, social and governance issues.
The multiple challenges besetting the world – from the pandemic, to climate change, to structural racism – have prompted ever more of us to believe that, on these issues, inaction is simply not an option. That’s why our purpose at LGIM is to create a better future through responsible investing.
Back to markets. While this key risk event will have to pass at some point, the longer-term outlook remains shrouded in uncertainty on other fronts, from virus developments to Brexit talks.
As a result, we approached this moment by repeating our mantra of ‘prepare, don’t predict’ – as we seek to manage risk and capture opportunities in order to achieve our clients’ long-term objectives.