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Equity Research; Clinton v Trump “sensitive stocks”

The US Presidential Election moves centre stage

america

Global markets have backtracked in recent days, worried about a perceived elevated risk factor of the US Presidential elections on the 8th November.

Also important are the Congressional elections, a total of 469 seats in the US Congress are up for election (34 Senate seats and all 435 House seats (House of Representatives). The issue is whether the Democrats can recapture the Senate (current balance is 54 Republicans/ 44 Democrats / 2 Independents).

The Obama Administration has struggled from day one with Republican efforts to block legislation and launch investigations. This “gridlock” is a persistent feature of the US political landscape making it hard for a Democrat President to pursue a policy programme (if the Republicans occupy the House) and likewise for a Republican President (if the Democrats hold the Congress).

A Republican President would see gridlock end, assuming the current Congressional balance. The Republicans hold both Houses though their grip in the Senate is weak. 2016 could see a shift in the Senate, though the Republicans should retain the House of Representatives.

Let us start with dispensing with false analogies, such as the “Brexit” referendum comparison. This spuriously claims that because polling and betting data on June 23rd got the outcome “wrong”, (in fact most polls predicted a very close result within the margin of error….which actually happened) this must mean Trump’s chances have been understated. Broadly I think “Brexit is irrelevant to US voting patterns.

The 2016 US election will be determined in the “Swing States” (Florida, Ohio, Iowa, Colorado etc) as it has been for decades. Yes there is a generational factor, and an anti-establishment factor which are more prevalent this time. However the issue is primarily the candidates themselves, their credibility and charisma. Marginal or “floating” voters in the swing states determine the US Presidential election, as always.

A very good view of the data workings of the US Presidential election can be found on:
http://projects.fivethirtyeight.com/2016-election-forecast/?ex_cid=rrpromo

US “Swing State” Electoral College Clinton Trump COMMENT
Florida 29 50.2% 49.8% A “must win” for Trump
Ohio 18 37.9% 62.1% A “must win” for Trump
Georgia 16 16.8% 83.3% A “must win” for Trump
North Carolina 15 51.4% 48.6% Important for Clinton
Arizona 11 36% 64% A “must win” for Trump
Iowa 6 36.1% 63.9% Affordable loss for Clinton
Nevada 6 54.5% 45.5% Important for Trump
Utah 6 24.3% 75.7% Important for Trump
Total 96 / 270

The Clinton “sensitive basket”

A Clinton victory (certainly our preferred choice) is a vote for the “status quo”. It would broadly endorse and continue the Obama Administration’s policies in relation to “Obamacare” and the current monetary policy framework of the US Federal Reserve.

It would also blend the Clinton’s 1990s policies, i.e. conservative and aimed at balancing the US budget whilst maintaining US defence and infrastructure spending. The Clintons if I recall, were not keen on foreign adventures after the failed Somali adventure early in Bill’s first term (the subject of a superb Ridley Scott movie “Black Hawk Down”). So foreign wars (as with Obama) are unlikely.

Equities – Positive COMMENT
iShares MSCI Mexico (NYSE: EWW) $1.2bn ETF tracking Mexican blue chips, average PE 19.5x, one hit exposure to the Mexican Bolsa.
SPDR S&P 500 ETF (NYSE:SPY) US blue chip $192bn ETF should be positive on status quo
Health SPDR (XLV) $11.2bn ETF should be rise on “Obamacare” survival
First Solar (Nasdaq :FSLR) Clinton will extend Federal solar tax breaks beyond 2016 to hit 500m solar panel residential target by 2020
Equities- Negative
iShares Biotech Index (Nasdaq: IBB) $7bn ETF tracking blue chip biotechs/ most exposed to pharmaceutical price reforms
Valeant Pharma Intl (NYSE:VRX) $10bn biotech co accused by Clinton in 2015 of “price gouging”
Currency COMMENT
Mexican Peso MXP/ USD likely to jump from current US$0.05156 levels
US Dollar USD positive as Federal Reserve would be intact
Japanese Yen JPY/USD likely lower as “safe haven” demand reduces

Mexican asset prices have seen significant volatility so far. Investors have been appalled at the Trump rhetoric and specific proposals on wall building, immigration controls (that would breach NAFTA’s principles) and personal attacks on Americans with Mexican heritage. Mexican blue chips will react to the US election whatever the result. Hence we have looked at a US based ETF with broad exposure as a “one stop shop” blue chip basket for Mexican assets.

On the currency front, we expect a positive response primarily due to maintaining the composition of the US Federal Reserve. We don’t see a major impact on commodities from a Clinton win.

The Trump “sensitive basket”

The notion of a Trump victory….well, I need to toughen up my fitness program, there is likely to be a world war soon! I am grappling with the concept of Donald Trump having to address complex world issues, propose and negotiate the US budget, head the complex US military presence globally, armed with soundbites and stereotypes.

The fact is Donald Trump is a total unknown political entity with zero voting record, a highly unpredictable character who has changed political allegiance many times, gone bankrupt many times, on his third marriage and engaged in highly fraudulent business dealings. There are worrying ties to the totally corrupt Russian leadership.

Donald Trump would certainly cause global markets to wobble. The only issue is how much? We would have to say between -5% to -10% as an immediate response.

Donald Trump did not understand the US constitutional system of checks and balances when he laced into Janet Yellen, the Federal Reserve chair, accusing her of creating a “false economy”. A victory would therefore disrupt the balance of the US Federal Reserve and wreck its credibility as a non-partisan independent institution.

Equities – Positive COMMENT
Lockheed Martin (NYSE:LMT) Trump has said he would increase US defence spending, hence higher Pentagon procurement budgets
SPDR S&P ETF Pharmaceuticals Trump is unlikely to implement reforms to unregulated US pharmaceutical pricing
Equities- Negative
Wal-Mart de Mexico SAB (ADR) Exposed to weaker MXP and confidence in Mexican economy/ consumer
Powershares QQQ Trust ETF US technology ETF $39.4bn – US technology stocks are widely held by global investors
SPDR S&P 500 ETF US blue chip $192bn ETF will drop on fresh uncertainties
Procter & Gamble (NYSE:PG) Significant operations in Mexico and other Latin American countries
Currency COMMENT
Swiss Franc CHF/ USD higher hence investors move to “safe haven”
US Dollar Sharply lower due to Federal Reserve issues
Commodity COMMENT
Gold Likely “safe haven” and a direct beneficiary;
Oil – WTI Agnostic to Donald Trump up to Nov 29th OPEC meeting; a possible short term “safe haven”

The US S&P 500 and Dow Jones should see a significant sell off if Trump wins – there is total policy blank there. Hence we select index shorts as exposure in the event of significant uncertainty/ risk aversion. Commodities we prefer gold, but crude oil is an alternative in the short term. Heading into the US election the US economy is in strong shape which is a good tailwind for incumbents. This was a strong factor for Obama in 2012.

Conclusion

There is tension in the air….and another very late night. We would keep the champagne corked and on ice, until Florida declares, and hope for not many “too close to calls”. Mindful of the 2000 election, Al Gore won the popular vote but lost the White House, we are not fazed by poll movements.

Back in 2008, President Bill Clinton remarked he felt “torn” as he “always wanted to see a black President and a female President”…l hope this happens in 2016.

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