Global Investment Strategy

GIS November 7 (Compare the Two)

Date: 2016-11-06 - Prepared by: The GISI

It would be reasonably prudent to reduce our exposure to stocks today, just for one day.

Paul Krugman recently argued that the big difference between BrExit and the US presidential elections is that Britain’s Remain campaign was weak and poorly prepared, whereas Hillary Clinton’s team is much better prepared, as well as more intelligent. Maybe. My definition of “intelligent” is slightly different.

We have argued since March 2016 that the odds of Donald Trump becoming president are 50% because the probability is too volatile and is, thus, stochastic. We still think it's 50%.

If Hillary Clinton gets elected we can rush back into stocks, considerably overweighting our positions, to make up for the first day rally of 3% to 4%. We don’t have to look for fundamental arguments here or to compare economic programs or geopolitical risks. Most institutional asset managers, banks, and other market participants want a Clinton presidency and stocks will undoubtedly reflect this wish.

Although markets have started to price-in a potential Donald Trump presidency, US stocks will fall by another 10% to 15% if Trump is elected. The US$ will also depreciate by 5% to 10% because of America’s huge Net International Investment Position (currently at around $8.0 trillion, see Chart 2 in this week’s GIS).

Hence, for foreign investors who don’t hedge their currency risk, a 15% to 25% capital loss is at stake. If Donald Trump gets elected, we will email a brief note with suggested asset allocation. Britain and Russia will benefit the most from a Trump presidency. Canada will benefit regardless of who gets elected—a great position to be in!

If Hillary Clinton gets elected, stock markets will rally for at least a week. The US$ may stage a knee-jerk rally of around 5%, but this will prove short-lived. US Treasuries won’t move by much. A Clinton presidency will adopt the Larry Summers, Paul Krugman and Lael Brainard economic philosophy.

As argued in our previous GIS publications, this means...

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