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Mid-Term Election Results: Wealth Managers' Reactions

Tom Burroughes, Group Editor, November 7, 2018


As results emerged early today, wealth managers began to react.

While results were still being finalized at the time this article went live, it was confirmed that the Democrats had re-taken control of the House of Representatives, ending the Republicans' eight-year leadership, while the GOP managed to actually consolidate its hold on the Senate.

The prospect of a divided legislature, seen as potentially constricting the Trump administration, did not appear to rattle wealth managers. To some degree there may be recollations of how, such as during the period after 1994, for example, a divided government appeared to run alongside a booming stock market, although circumstances are never repeated exactly.

There have been more recent examples, as when the GOP won the house in 2010 during the Obama administration.

By early today, Democrats had secured more than the 218 seats needed to win control of the House, with some races yet to be called.

While democratic elections in other countries do not usually grab so much attention, the sheer size of the US economy and markets means that its political moves attract considerable focus. Also, President Donald Trump's ratcheting up of tariffs against China, his hardline stance on immigration, the large corporate tax cuts and deregulatory efforts have meant that changing political fortunes have potential to cause economic effects greater perhaps than in recent years.

The outcome appeared not to be at odds with most expectations. That said, here are some comments from economists, wealth managers and other financial industry figures in Europe and Asia as the results started to come in. We may update this item later as the North American sector has had more time to digest the outcome.

Geoffrey Yu, head of UK Investment Office, UBS Wealth Management
US stock futures edged up this morning, signalling the market sees Republicans as having marginally outperformed. For once, the polls were pretty much on track, but the pundits have been careful to manage expectations after 2016's miscalculations, which on balance is probably a healthy development.

From an economic standpoint, the more gridlock can be avoided the better. We will be interested to see whether certain sectors can benefit from this outcome, such as infrastructure.
Investors entered the month relatively light on risk following a torrid October, so we are likely to see a little more risk put back on the table heading in to the year-end. The short-term focus will swiftly turn towards the G20 Summit, and investors will be watching to see whether there will be a favourable outcome for Trump on the trade front following a meeting with China.

Chief global strategist John Vail at Nikko Asset Management
The Democrats did a good job of selecting House candidates, many of whom are women with military backgrounds, to defeat GOP incumbents, so the House will be controlled by the Democrats. This will make Trump’s life miserable for the next two years, with many deep House committee investigations into his affairs, which could well lead to impeachment. Incriminations, however, will likely fly from both sides, as Trump will likely appoint a much more partisan Attorney General.

The GOP increased its majority in the Senate by several seats, which will make confirmations of judges and administration officials easier and overriding his vetoes harder. It will also make conviction of Trump, if impeached by the House, less likely. In such a situation, Trump might not even wish to run again and, in any respect, the chance of a GOP Presidential victory in 2020 seems much diminished. This may well mean higher taxes and more business and environmental regulations after 2020.

Michel Perera, CIO from Canaccord Genuity Wealth Management.
Beyond the immediate market reaction, there should be a more bullish backdrop building up in the coming year for risk assets. Since 1950, stock markets were up every year after mid-term elections, due to pump-priming to help the President’s re-election.  President Trump will try to re-engineer the “sugar high” that the tax cuts created this year. His options will be more limited.

He could do a large infrastructure spend, which the Democrats would vote for. It will take years to build, though, and years before the impact is felt by voters. The other option, perhaps less palatable, but much more effective, would be to settle the US-China trade dispute, removing the overhang on industry and agriculture, as well as financial markets, which have been worried sick about it. Noises have come out of both Trump and China about this recently.

Richard Larner, head of research at Brooks Macdonald
Today’s result will affect the US political environment, but on its own it does little to change our broader market view. It supports our house view that the tailwinds acting to strengthen the dollar are lessening, as we expect greater oversight of Trump’s administration to reduce the support the currency has seen from protectionist trade policy and pro-growth fiscal reforms (albeit we recognize the potential positive effects that would be associated with any infrastructure investment program). This should be to the advantage of assets which benefit from a weaker dollar, such as emerging markets equities.

We do not believe we have witnessed a systemic deterioration in the investment environment, but we expect more episodes of market volatility as the global monetary policy backdrop shifts further from quantitative easing towards quantitative tightening. We retain our preference for equities over fixed income, both on valuation grounds and as a result of specific policy headwinds facing the latter. Nevertheless, given the many risks to the outlook we continue to endorse a balanced approach to portfolio construction, utilizing alternative income-producing assets to increase portfolio diversification.

Paras Anand, head of asset management, Asia Pacific, Fidelity International
For once, the outcome of the mid-term elections has gone the way the pollsters and political analysts expected, with the Democrats taking the House of Representatives and the Republicans retaining their marginal hold on the Senate.  In what will be seen by some as an inevitable reaction against an unconventional White House, the question is whether there is anything for investors to consider in this result.

Perhaps not in the short term. However, as we go through 2019 we might look back and see this result as a further impetus to domestic growth.

Part of the reason for the post-2016 election ‘Trump bump’ was the belief that the economic agenda would be domestically focused, particularly on infrastructure investment. However, there has been limited progress in this area as other issues - tax reform (achieved) and healthcare reform (failed) - have taken precedence.

During the 2016 Clinton election campaign, infrastructure spend was high on the Democrat’s policy agenda (as it was for Trump). It is possible that with a bi-partisan focus on the pent-up need for domestic infrastructure investment, the Democrat view on the budget deficit may change from opposition (to tax cuts) to accommodation (spending on roads, hospitals, airports).

Tuan Huynh, chief investment officer and head of discretionary portfolio management, Asia Pacific, Deutsche Bank
Despite this victory, the outcome falls rather short of some Democrats’ hopes, and the Republicans will see it as a positive outcome for President Trump, who has clearly managed to recharge his base. From an investor’s perspective, what is important is how the election outcome will shape policy actions which could, in turn, alter our fundamental view on various asset classes. The “divided Congress” outcome (which seems very likely), is not necessarily a bad outcome when looked at from the prism of historical stock market returns

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