Investing Strategy If Democrats Sweep Clean

  • by Standard Chartered Bank Malaysia
  • US Democrats are likely closing in on a ‘clean sweep’ of the elections to the White House and the two houses of the Congress. This, we believe, is good news for our preferred risk assets, given the Democrats’ overall pro-growth policy stance, large-scale infrastructure spending plans and a more engaging foreign policy.
  • Equities: Expectations for US Q3 earnings have improved over the past month. Our preferred technology and healthcare sectors are likely to outperform, with expectations for just 1% and 2% contraction in earnings.
  • Bonds: US Treasury yields are likely to be choppy ahead of the elections; we do not expect a sustained rise in yields above 1% in the next 12 months.
  • FX: The USD’s corrective rally has been muted thus far. A break above 1.1925 in the EUR/USD would signal that USD weakness is reasserting.
  • US Democrats are likely closing in on a ‘clean sweep’ of the 3 November elections to the White House, the House of Representatives and the Senate, according to polls. This, we believe, is good news for risk assets, given the Democrats’ overall pro-growth policy stance, large-scale infrastructure spending plans and a more engaging foreign policy.
  • Democrat candidate Biden has widened his lead this month in the race to the White House. The first presidential debate appears to have given him a tailwind into the last mile. President Trump’s COVID-19 infection might have garnered some sympathy votes from undecided voters, but his subsequent flip-flop on a new stimulus package seems to be working in the Democrats’ favour, given the latter having already approved in the House a bigger USD 2.2trn stimulus package (which the Republicans did not support). A clear Biden win should reduce the chances of post-election uncertainty caused by the above-average number of postal ballots expected this time (the possibility of a prolonged period of uncertainty, as postal votes are counted, has troubled investors since Trump warned of the prospects during the first presidential debate).
  • The Senate race is still too close to call, though here too the Democrats appear to be gaining ground. However, the Democrats are unlikely to win a clear 60-seat majority needed to decisively overcome filibustering and, therefore, any Republican opposition to its plan to raise corporate and personal taxes. That is good news for investors who see higher taxes and regulation as main downsides from a Democrat ‘clean sweep’. Democrats have the added advantage of a USD 4trn infrastructure spending plan if they win. This plan, focussed on building green energy infrastructure, healthcare and education spending, could potentially lift long-term US growth prospects, given higher growth multipliers.
  • We believe the above turn of events explain the restrained equity market volatility over the past week, the rebound in risk assets and the range-bound USD. We would, thus, continue to average into our preferred assets, including US and Asia ex-Japan equities and EM, Asia USD and US High Yield (HY) bonds, especially if any volatility in the next few weeks make them available at more attractive prices (see page 4 for more on asset class implications from a Democrat ‘clean sweep’).  

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