7 November 2016

Over the past week Australian shares were 1.8% lower. Shares in developed countries lost 1.8% with the US market down 1.9%. Shares in emerging markets lost 2.6%. The Australian dollar was 1% higher at 76.73 US cents. The 10 year bond yield in Australia was 0.05% lower at 2.33% while in the US, the 10 year bond yield closed the week 0.07% lower at 1.78%. The oil price lost 9.5% to 44.07 US dollars per barrel.

All eyes are on the US election this week. Polling day is 8 November. There is the possibility of contested votes delaying the final result. The election appears very much a vote on 'fit to govern' as concerns about Democrat Hillary Clinton (hidden emails) and Republican Donald Trump (racism, xenophobia and misogyny) dominate consideration of their actual policies.

Trump has recovered much of Clinton’s large lead and at the time of writing, Clinton leads by a small margin. The US legislative structure or 'legislature' is divided into two houses; the House of Representatives and the Senate. The Republicans hold a majority in both. This is important: the elected president and the structure of the legislature combine to provide an outlook on possible policy change. For instance if Clinton wins but the Republicans maintain control of both houses, then large policy changes are less likely.

Share markets have fallen as Trump’s polling has improved. It’s difficult to make short term forecasts. We typically don’t do trades which are highly speculative as they don’t fit well with our responsibility to invest our members’ money for the long term. For instance, if Clinton wins, which at the time of writing is the most likely scenario, then markets may well recover some of their recent losses - a 'relief rally'. If Trump wins then markets could fall further, as people feel there is a greater risk of policy mistakes, or the bad news may already be priced into markets.

Both candidates have policies which in theory could support longer term growth:

  • Clinton - tax reform, infrastructure and education spending
  • Trump - reforms to tax and healthcare.

However both candidates have stated preferences to protect US industries through changes to free trade policies and protection of industries. These changes and the likelihood of retaliation by other countries would likely reduce global economic growth.

Signing off
David Bell

Past performance isn't necessarily an indicator of future performance.
All data sourced from Bloomberg.