Trump in the White House?Investors grow nervous as election day nears

The smart money has for months been on a Clinton win but markets are becoming uneasy as the outcome looks increasingly uncertain.

For months, the “smart money” in financial markets has been assuming that Hillary Clinton will win Tuesday’s presidential election.

However, during the last few days, Donald Trump has started to claw back Mrs Clinton’s poll lead, even going ahead in one poll.

Investors are starting to get uneasy.

And some are recalling, nervously, that the “smart money” was also convinced, ahead of the UK’s EU referendum, that a majority of Britons would vote Remain.

The received wisdom is that a victory for Mrs Clinton would be better for stock markets and the US dollar.

Her policies would essentially represent continuity with Barack Obama’s government which, while some would disagree violently, has been seen as being largely benign so far as the majority of businesses are concerned.

Mrs Clinton’s policies are regarded as more expansionary than those of Mr Trump because she favours moderately higher spending to boost targeted parts of the economy but only over a gradual period.

She has, for example, pledged to spend nearly twice as much on infrastructure projects such as road and rail as Mr Trump.

This is spending that is badly needed – as anyone who has experienced America’s dilapidated public transport or road networks during the last few years will be painfully aware.

Crucially, Mrs Clinton is also seen as being more in favour of free trade, although, during the course of the election campaign, she has had to tone down such rhetoric.

Free trade, despite having raised living standards for Americans during the last half-century, is now being blamed for many of the country’s problems and especially by unskilled or low-skilled workers who have seen their jobs taken away by cheaper competitors overseas.

All that would suggest ease with another Clinton in the White House and yet, investors do have some reservations over what a Clinton victory would be like, were it to be accompanied by the Democrats reclaiming control of Congress.

This is a prospect that horrifies investors almost as much as a Trump victory does.

Were Mrs Clinton to win the presidency and Congress, she would be able to push through quite a radical left-wing agenda, which would be bad news for businesses in several parts of the economy – notably healthcare stocks and big pharma.

Big drug companies could face price caps, for example, while banks and the financial services sector could also suffer tougher regulation.

This would be deeply ironic as Mrs Clinton’s husband, when in office, repealed Glass-Steagall – the law put in place in 1933, following the Wall Street Crash four years earlier, that largely separated commercial banking and investment banking.

It is a measure that many see now as having helped create the global financial crisis and the evolution of institutions that were “too big to fail”.

Another victim would probably be the energy sector – although any attempts to curb activity by frackers could, paradoxically, help existing energy companies as it would restrict supplies and, in the process, push up energy prices.

At present, though, a Clinton victory accompanied by the Democrats gaining control of Congress is seen as somewhat unlikely – although it is certainly possible that the Democrats will win control of the Senate (the upper chamber).

The general assumption, though, is that the Republicans will retain control of the House of Representatives (the lower chamber) and, if they were also to retain a majority of the Senate, they would be able to block some of Mrs Clinton’s ambitions just as they have with Mr Obama.

That may make for more uneasiness when arguments next arise over the level of the national debt, as it has done in Mr Obama’s time, but it is something with which investors could probably live.Mr Trump’s rhetoric has been protectionist and anti-free trade.

If he proceeds with his promises and erects trade barriers, it is possible American companies will be hit by “tit-for-tat” trade battles, hitting their profits.

American households would also suffer as the price of some goods and services that have been brought down as a result of free trade could be pushed higher – hitting disposable incomes.

Mr Trump wants to renegotiate or even tear up the North American Free Trade Agreement (NAFTA), the 22-year old free trade deal between the US, Canada and Mexico, whose currency has almost become a proxy in  recent weeks for how foreign exchange markets assess the likelihood of a Trump victory.

That would be bad for many businesses.

Mr Trump is also aggressively anti-immigration which, if he enacts such policies in office, could potentially create skills shortages and push up inflation.

Any businesses relying on multilateral trade will therefore be nervous about a Trump victory.

A Trump win would also have a knock-on effect outside the United States.

Shares in emerging market countries, which have been among the biggest beneficiaries from a growth in international trade, could be among the biggest casualties of a Trump victory.

The same is true of shares in Japan, one of America’s most important post-war allies, as Mr Trump has indicated he would want to see the Japanese government increasing its financial contribution to the cost of American troops stationed in the region.

Mr Trump has also used aggressive language towards China during the election campaign.Should he follow through with a foreign policy that is deemed to be anti-Chinese, this could prompt Beijing itself to adopt aggressive foreign policies, in turn obliging Japan to have to spend more money – money that it can ill-afford – on defence.

Just about the only sectors that would welcome a Trump victory, assuming he followed through with his promise to build a wall between the US and Mexico, would be the construction and building materials sectors.

Then there are certain sectors that are under threat regardless of the electoral outcome.

There are, for example, growing pressures on the country’s healthcare system, thanks to both the ageing population and the obesity crisis, so prices are going only one way.

That is creating growing antagonism among ordinary Americans – and this is even before the extra costs imposed by Obamacare, which basically obliges better-off Americans to subsidise their less well-off compatriots, have truly bitten.

And a further scenario is that, regardless of who wins the election, the outcome is contested by the loser or, at least, remains in the balance.

As was the case in 2000 and the notorious “hanging chads” episode, in Florida, that would be bad for both shares and the dollar.Some fund managers, such as Yogi Dewan of Hassium Asset Management, who manages around $1bn on behalf of high net worth individuals, are so worried about this possibility that they have disinvested from American shares.

The other big factor in the background, regardless of the election, is the position of the US Federal Reserve.

Having already raised interest rates once this year, the central bank of the world’s largest economy has been widely tipped to raise rates again in December, even though the latest jobs data – published on Friday – was somewhat disappointing.

This has been largely priced in by both bond and currency markets but how the Fed is forced to react to, say, a loss of confidence sparked by a Trump victory or a Democrat clean sweep is anyone’s guess.

To conclude, a Clinton victory, accompanied by the Republicans retaining control of both the Senate and the House, is probably the outcome most investors would prefer to see.

If this happens, there is likely to be a modest rally in both shares and the US dollar.

A Clinton victory accompanied by a Democrat clean sweep of Congress would be accompanied by falls in healthcare, financial and energy stocks and, probably, a modest decline in the US dollar.

A Trump victory is likely to be greeted by a drop in US shares and the dollar – as well as a drop in shares elsewhere around the world.

Ahead of the EU referendum, most professional investors were confident of a victory for Remain, perhaps influenced by the views of their friends, neighbours, business associates and workmates in the London bubble.

They received the shock of their lives.

Many such professionals now report having visited America and being struck by the desire of many Americans, outside the “Beltway”, to similarly give the establishment a bloody nose.

They are braced for a sleepless time during the early hours of Wednesday morning.

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