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US Presidential Election: A SKAGEN Perspective

Although a formal winner is still to be declared, the increasingly likely outcome is that Joe Biden will become President after turning the key states of Michigan and Wisconsin. He currently leads Donald Trump by 253 electoral votes to 214[1], just 17 from victory, with betting markets currently putting his chances of moving into the White House at 85%.

Despite the uncertainty, stock markets have reacted positively. The US S&P 500 index rose 2.2% on Wednesday – its biggest jump since June and a record post-election daily return – while the Euro Stoxx 600 and MSCI Emerging Markets indices climbed 1.9% and 1.0%, respectively. SKAGEN's equity funds all participated in the rally to register gains and look well-placed to prosper despite any continued political turbulence.

Long-term stability

Investors appear relieved that despite a Democrat taking the Oval Office, Republicans are likely to maintain control of the Senate, giving them the power to block Biden's plans to raise taxes for companies and the wealthy. The political gridlock would also limit the incoming President's ability to introduce more stringent regulation, boosting healthcare, energy and technology companies, in particular (the Nasdaq index rose 3.9%; its largest daily gain since April).

With the anticipated 'blue wave' failing to materialise, expectations of large-scale fiscal stimulus have also fallen. This boosted US government bonds, which experienced one of their biggest rallies following an election in the past two decades. Along with pollsters – who can add their latest forecasting failure to those of Brexit and Trump's victory in 2016 – other potential losers look to be infrastructure and green energy, which Biden had promised would receive $2 trillion of government funding.

While domestic growth prospects now appear lower, US companies should benefit from calmer international relations under a new Administration following the erratic trade policies of Trump. Although Biden is expected to remain sceptical towards China, he would likely roll back the tariffs introduced by his predecessor, which would also benefit US consumers. Emerging markets generally should prosper from less protectionism, particularly if the US Dollar weakens as a result of slower economic growth and the use of more aggressive monetary stimulus.

Short-term volatility

Despite the corporate landscape appearing smoother longer-term under Biden, markets could be volatile until power definitively changes hands in Washington. While Trump's claims that he won several states have little supporting evidence and therefore legal standing, his aim of casting doubt over the election result and undermining its institutions could create uncertainty for weeks rather than days if litigation unfolds.

So far markets have kept their composure. The VIX volatility index fell following the election and although it remains above average at around 30, it is below October's peak (40) and well down from March's all-time high (83). This may be premature, particularly if Trump's protests spread to the streets, but my advice is to try and look beyond the short-term haze. As I wrote previously, the election result is unlikely to have a significant long-term effect on stocks, even if Trump somehow clings on to power. At SKAGEN we will remain calm, focus on the long-term and be ready to take any opportunities that come our way.


[1] Source: BBC


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