With the US midterm elections playing out as expected, the impact on the markets is expected to be negligible, according to one portfolio manager.
Candice Bangsund, vice president at Global Asset Allocation Fiera Capital, said the base case gridlock scenario will prevail but with potential positives for investors.
The election results enabled the Democrats to take control of the House of Representatives, while the Republicans marginally strengthened their grip on the Senate. It means a split Congress and makes passing major legislation much harder for policymakers.
On the flip side, Bangsund said the divide suggests Democrats will be unable to roll back the tax cuts, which have provided such a boost to company earnings, or reinstate financial regulations. And she added that a split government, with the Democrats now promising to provide more checks and balances, is “likely to be supportive for the markets in general”.
Tax and healthcare reform will now be highly unlikely, she said, meaning Republicans are likely to have difficulty passing a second tranche of tax cuts that President Donald Trump had previously floated, while there’s little chance of repealing and replacing the Affordable Care Act (ACA).
However, Bangsund said there was hope for the bulls and one particular area of common ground.
“An area of compromise - and potential upside surprise - could be on the infrastructure side, where both Trump and the Democrats appear to support an increase in federal infrastructure spending that could potentially move forward in 2019 and provide a small boost to growth in the coming years.”
She added: “The status quo for both the economy and the markets should ultimately prevail. As such, global equities [were] mainly higher [yesterday] morning as the passage of events has likely removed an element of uncertainty from the marketplace.
“From an interest-rate perspective, while rates have indeed declined on dwindling expectations for major fiscal stimulus - and accordingly, an accelerated path of policy normalization - the path of least resistance for rates should be higher as markets refocus their attention to the growth-inflation backdrop in the US and the Federal Reserve's desire to move rates higher, albeit very gradually."
The major negative, said the portfolio manager, was that the votes cast will have little bearing on the trade front with protectionism risks set to linger on.
Bangsund said Democrats and Republicans are more aligned on their views on this than many people think and that an upside scenario remains that Trump seeks a deal with Chinese President Xi Jinping at the G20 Summit later this month.
On the domestic front, Trump’s divisive rhetoric means there could be even more vicious sparring across Congress.
She said: “Democrats have pledged to check the President’s power and are expected to attempt to frustrate and stymie the President’s agenda through a flurry of investigations and subpoenas against Trump and his aides, suggesting that political angst in Washington is surely to remain front-and-center going forward.”
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