“Whoever wins the US presidential election, there will be a lot of liquidity coming into the markets. “

What are the main risks and possible consequences for the markets in case the Democrats and <a href="http://www.world-today-news.com/donald-trump-whats-behind-the-us-presidents-baltimore-attack/" title="Donald Trump: What's behind the US President's Baltimore attack”>Kamala Harris win the US elections? And what if the Republicans and Donald Trump win? Which asset classes could benefit? And what are the implications of asset allocation in general? Bruno Lamoral, Portfolio Manager at DPAM shares his insight in this contribution to our site.

What if Harris wins?

At this time, the polls for the American elections still do not show a clear winner. Kamala Harris leads Donald Trump in the national polls, but in the betting markets we see the opposite picture. To this day, it is still difficult to predict who will win the elections. Polls don’t say everything either. In 2016 and 2020, Trump did not do well in the polls, but he still managed to surprise. However, there is a good chance that if Harris wins, she will face a divided parliament. The markets also seem to like this scenario, as it would only require small, neutral changes to existing economic policies.

But what if Kamala Harris wins the presidency and the Democrats gain control of both the Senate and the House of Representatives? One of the biggest concerns of the market is the planned changes in tax rates. Kamala Harris aims for comprehensive tax reform, from introducing a minimum tax rate and increasing long-term capital gains taxes for the wealthy, to quadrupling the tax on stock purchases. But the proposal to increase the corporate tax rate from 21 to 28 percent would have the biggest impact on the financial markets. It is estimated that this would reduce the profits of S&P500 companies by 6 percent, which would represent a good start to the overall performance of the market. This is in stark contrast to Trump’s proposal for a 15 percent corporate tax rate, which would have the opposite effect.

Another focus of Harris’s campaign is the fight against inflation, an issue that Biden has often criticized. Her proposal to impose a federal ban on supermarket price increases is meeting resistance. Economists argue that price controls often do not produce the desired results and question the need for such measures, particularly now that inflation is already falling. These government actions, including its plans for the rental market, have reduced their appeal to Wall Street. In response, Harris is trying to improve her pro-business image by saying she supports free and fair markets. But her shifty rhetoric, along with her vague stance on issues such as trade policy and geopolitics, add to the uncertainty.

Therefore, a Democratic election victory may have a negative effect on the market for stocks. However, we believe that such an effect is less likely. Most of the measures she proposes require legislative changes, so with a divided parliament there would be little change across asset classes. And the market would respond more positively to that.

What if Trump wins?

A Republican victory, especially with Donald Trump as president, could have a major impact on the economy and asset markets. While stock markets would welcome the proposed corporate tax hike from 21 to 15 percent, other government plans, including higher rates and a tough stance on immigration, are likely to lead to inflation higher and slower economic growth. For example, a 60 percent tariff on Chinese goods and 10 percent on other world imports would raise total tariffs to the highest level since 1930. The Chinese and European markets are likely to be the hardest hit because they the two major trading partners running a bilateral trade surplus of over $200 billion with the US. But the US market itself could also be adversely affected if residents experience more inflation due to a combination of higher import prices and more expensive domestic production. In addition, strict immigration policies could exacerbate labor shortages, increase labor costs and further increase inflation.

But what will be the effect of the Republican election victory on the various asset classes? Renewables have already been valued as Trump is expected to withdraw from the Paris climate accord and the IRA (Inflation Reduction Act) it will bring it back to some extent. Trump has also criticized Big Tech after the “deplatformization” of conservatives, but he also wants to protect the sector to prevent Chinese tech companies from taking over.

Meanwhile, banks and traditional energy sectors, including oil and gas, could see a positive impact from deregulation and protectionist policies. This could lead to more mergers and acquisitions, which would benefit US small caps. In Europe, consumer sectors (e.g. retail, grocery, spirits) and large trade-focused banks are most at risk, while sectors such as construction and manufacturing could benefit from up-and-coming trends. funding under a Republican administration. For the bond markets, the consensus is that the increase in the budget deficit and higher inflation will lead to higher interest rates. However, this effect could be limited if it comes with lower economic growth. In this scenario, gold could reach new highs.

Regardless of the outcome of the US elections, we expect a lot of liquidity to come to the market next year. On January 1, the US government will reach its debt ceiling and no new debt can be issued. The Treasury must spend $700 billion from the general account – taking money from outside the banking sector and adding it to bank reserves. The Fed QT (tighten monetary policy right.) likely to be phased out in the first quarter of 2025, which will reduce the Fed’s balance sheet decline. Together we can count on $1 trillion in full liquidity in the first half of 2025.

This is a contribution from Bruno Lamoral, portfolio manager at Degroof Petercam Asset Management (DPAM).