Market risks and opportunities from 4 possible US election outcomes; Morgan Stanley draws scenarios

With the US Presidential Elections just around the corner, it’s imperative for investors to gear up for any shock movements or expected turns in equity markets across the globe. Stock markets are bound to react in one way or the other whether Donald Trump returns to power or Joe Biden takes a seat in the Oval Office. In a recent blog, global investment bank Morgan Stanley carved out four possible outcomes of the November 3 elections and listed down various risks and opportunities that come with all those different outcomes.

This time, understanding the various risks and opportunities, ahead of the US election is of much greater importance with the potential of a delayed result. However, focusing just on the Presidential race could be a wrong road. Morgan Stanley’s US Public Policy team in July noted that the overall government election outcome may matter more.

Straightways and Detours

These are two different scenarios. ‘Straightways’ are markets where the outcome of the elections will barely have any effect on the base cases currently established. Some straightaway strategies include being cautious on oil, bullish on pound and dollar positions. “These positions stand out for having attractive upside/downside across all election outcomes,” says Andrew Sheets, Chief Cross-Asset Strategist, Morgan Stanley. ‘Detours’, meanwhile, are market moves that will be swayed by election outcomes.

Morgan Stanley termed unified government as the best outcome. In either a Blue wave or a Red redux, a higher net fiscal impulse is likely to drive back-end rates higher, it said.

Democratic take-over

A democratic win is believed to be a drag on US equities. In the short-term this might hold true as Joe Biden plans to increase taxes on winning the White House. Morgan Stanley forecasts that S&P 500 would fall to 3,100 between election and January if there is a Blue Wave. However, it is not being seen as a long-term reversal of trend. “While we think the S&P 500 would initially trade lower in a Blue Sweep scenario, as rates rise, we would ultimately view this as a ‘dip to buy’, with a bull market still intact,” says Andrew Sheets. A win for the democrats is also being seen as relatively good for European equities and emerging markets, as in such a scenario, more US-fiscal spending and tax policy reforms are expected.

Trump returns

In a scenario of Donald Trump’s win, the S&P 500 could jump higher till the inauguration in January. Morgan Stanley said that telecom, energy, and asset managers would likely get a boost. European markets are still expected to gain in this scenario, but only in the near-term. “Longer term, however, the relative case for Europe and other global markets might not be as favorable under this scenario, compared with a Blue Sweep,” Morgan Stanley said. With Donald Trump returning to the White House, the S&P 500 may zoom to 3,600 by January.

No man’s land

If the November 3 vote yields a result where there is a Blue Tide, with Democrats winning all but the Senate; or a Thin Red Line, with Republicans winning all but the House, the result should signal investors to be prepared for detours in many asset classes. In such a scenario the S&P 500 could hover around where it is right now on the election day.

“An economy in recovery, but with some market doubt around the ultimate strength of that recovery, is most likely the status quo,” said Michael Zezas, Head of US Public Policy and Municipal Strategy at Morgan Stanley. He noted that rates are less likely to rise under this scenario, providing some valuation support. But, in the longer run, equities and credit carry more risk in a divided government.