A choice without passion

Daniel Steck, executive director, is a senior portfolio manager and U.S. equity analyst at REYL

Hillary Clinton and Donald Trump, don't seem to stir up passions among the American people. There is also indifference in the financial markets, says Daniel Steck, executive director, senior portfolio manager and U.S. equity analyst at REYL.

On 8. November, the U.S. will elect its new president, who will succeed Barack Obama. But one is a far cry from the enthusiasm its candidacy eight years ago had generated in the U.S. as well as abroad. The two title contenders, Hillary Clinton and Donald Trump, don't seem to be stirring up passions, aside from the Republican's polemical statements, and are raising doubts even within their own ranks. Indifference also prevails on the financial markets. One might have expected some nervousness on the part of investors before this important date. But there is no sign of this. Evidence of this is the volatility of U.S. equities, as measured by the VIX index, which remains at extremely low levels, indicating a certain serenity among financial players.

Reassuring consistency
The calm in the markets is due to the fact that a consensus has largely emerged in favor of a victory for the Democratic nominee. What gives investors confidence, however, is not Hillary Clinton's program, but rather the relative political status quo that her election would entail. For the congressional elections, which will be held on the same day, are also likely to produce a result similar to today's situation, with a Republican House of Representatives and a Democratic Senate. A Congress with a Republican majority would severely limit the president's room for maneuver.So what are the points of contention in this election and what reforms could still be introduced? Could some of them pose a threat to the financial markets?

Reduced room for maneuver
The two title contenders and their respective parties hold opposing views on many issues. This will probably result in a blockade in Congress. One of the most striking controversies concerns tax policy. Clinton wants to tax high income brackets more and limit certain benefits. These choices could generate more than $1.1 trillion over the next decade. Of course, such a tax reform seems unlikely without a Democratic majority in Congress. Trump, on the other hand, never squeamish, proposes drastic tax cuts for individuals and businesses. The problem is that the implementation of such a program would result in a $3 trillion revenue shortfall and would significantly unbalance the national budget. As a result, it is unlikely that Congress, even with a Republican majority, would agree to such an extreme position.

On health care, the future leader will also be at an impasse. Despite the vehemence of her remarks, Hillary Clinton will not be able to impose controls on drug prices if the balance of power in Congress remains unchanged. And their opponent will probably not be able to draw a line under the achievements that have been made thanks to Obamacare. Because it is important to remember that the percentage of Americans excluded from health care has dropped from 18 percent three years ago to less than 11 percent today. A step back is unthinkable.

Points of approximation
So will the U.S. election have no impact on the economy at all? Despite their differences, Hillary and Donald agree on several issues, which will undoubtedly lead to concrete decisions. First, all parties agree that there is an urgent need to renew aging infrastructure after years of inadequate investment. Hillary Clinton has proposed launching a $500 billion program aimed primarily at modernizing roads, rails, airports and telecommunications equipment. Trump topped them, talking about a double amount, though he forgot to explain how he will finance it. Whatever the outcome of the election it is to be expected that the proposals in this area will be adopted by Congress in one form or another.

A second area of agreement, to be sure, concerns the treatment of cash holdings that U.S. companies have parked overseas. It is estimated that over $1 trillion is blocked abroad because repatriation is highly taxed (35%). Trump proposes a partial amnesty (tax rate of 10%), while Clinton recommends a more global solution in both cases, $200 billion could be repatriated to the U.S. and benefit business investment in a significant way. With regard to foreign trade, the investor, who is a strong advocate of maximum liberalization of this area, considers Donald Trump a threat. The candidate has vehemently stated on several occasions that if he wins, he will renegotiate or even abolish numerous international agreements, such as the NAFTA or TTIP free trade agreements currently being negotiated with Europe. But it's too easy to forget that Hillary Clinton also emphasized that the American worker has suffered greatly from globalization and free trade policies. Therefore, regardless of the outcome of the election, one must expect a return to protectionism.

Beware of a sudden turnaround at the last minute
In the months following a presidential election, when hot campaign talk gradually gives way to pragmatic decisions, the U.S. stock market has historically held up well. Nevertheless, we should beware of excessive downplaying, because a last-minute turnaround is always possible. Indeed, it is not certain that the prospect of a Donald Trump presidency, reinforced by a majority in Congress, will be so well received by investors. While the market is generally not very favorable to democrats, it detests uncertainty, lack of visibility and brutal changes in the environment above all else. You have to expect all of this from Donald Trump.

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