For David Lafferty, chief market strategist at Natixis Global Asset Management, a key risk to market thinking and something he worries about following on from the experience of Brexit is polling error.
In the run up to the Brexit vote he said, there was a discrepancy of about 4% that the polls didn’t pick up.
“If you look at the battleground statesin the US it is clear why everyone is pricing in a win for Clinton at about 75% to 80%, she is currently winning or tied in all of the battleground states,” Lafferty said, “Florida is particularly important because there is almost no electoral math that elects a Republican without winning Florida and the two candidates are in a dead heat there.”
But, he added, this probability is based on the fact that the polls are accurate.
“If Trump does 1% better in the battle ground states than the polls predict, Clinton still wins. If he does 2% she still wins If he does 3% better it is very close, it is about 50%.”
For investors, however, the question is, what exactly would a Trump presidency mean for markets?
According to Papic, Trump has already proved a tailwind for both the dollar and Treasuries.
“We have correlated the probability of Trump winning based on various betting markets with treasury yields and the dollar. Right now he is influencing the 10-year yield. The R-squared is 0.76%.”
While admitting that the sample size is only three months, Papic said that indicates that Trump is part of the general global uncertainty that after Brexit has influenced various assets, especially safe havens.
Risk off
“I think if he does win, that means you will see a similar reaction to what we saw after Brexit: a spike in safe haven demand that would be positive for the dollar.
Papic is also of the view that with a Republican Senate and House behind him his fiscal spending plans would start quickly, which would be positive for growth.
“Trump would be positive for equities in the long term, mainly because of his foreign policy,” Papic said, “he would increase global geopolitical risk massively by withdrawing what is left of US hegemony, which would definitely be a risk off event but US equities would outperform in relative terms because they are the least high beta market out there.”
Lafferty agrees that the market would take a sharp risk off stance should Trump ascend the presidency, but is less convinced about his impact on the dollar.
“It is not clear what Trump will mean for the dollar. The market would go risk off because he brings more uncertainty than Clinton, he does not have a policy history, she does,” Lafferty said, adding because of this uncertainty, if this were any other country, Trump’s election would be very bad for the currency.
“My heart says that the dollar would really struggle under a Trump presidency but my head tells me that whenever the world goes risk off the dollar rallies,” he said.
In terms of arguments about fiscal spending, he is also a little more cautious, pointing out that from the research he has seen, Trump’s spending plans would “blow out” the US deficit if one includes the impact of growth, whereas Clinton’s would likely be around breakeven.
