Both the Dow Jones Industrial Average and S&P 500 were looking the worse for wear this week. The former fell for its third consecutive month and the latter suffered its worst month since January. The Nasdaq Composite also lost much of the ground it gained in October on Monday.
However, Fidelity International multi asset CIO James Bateman predicts that the outcome of the election also has consequences for UK equities, particularly the constituents of the FTSE 100. “Around 75% of FTSE 100 earnings are denominated in US dollars, making the outcome of the Hillary versus Trump circus and the resultant impact on the US dollar a key question for UK investors,” he stated. “The more domestically focused FTSE 250 should be comparatively well shielded, though it is worth remembering that the US is still the UK’s largest export partner.”
In Bateman’s view, a Clinton presidency would pose greater risks for certain individual sectors like healthcare, which comprises over 11% of the FTSE 100 stocks. However, he sees Clinton as the “continuity candidate for dollar strength,” which would support globally exposed UK large caps.
“Over the medium to long term, we would likely see further dollar strength under a Clinton presidency, with the potential for more supportive fiscal policy to boost the economy and strengthen the case for tightening monetary policy,” said Bateman. “This would help to boost the US dollar against sterling, particularly if UK fundamentals weakened.
“More widely, a Democrat victory would also represent a broad continuation of the US’s global role,” he continued. “This would also be supportive for internationally exposed UK companies, particularly those with emerging market exposure, which rely on the relative openness on the international system.”
By contrast, President Trump would threaten wider risk-off moves in the immediate aftermath of the result and be the “short term nemesis” of dollar strength, said Bateman.
“It is hard to see how the dollar would not sell off in reaction to a Trump win, with his nativist sentiment and economic isolationism clearly detrimental to the US economy. Yet in the event of a Trump victory, UK investors would risk being on the losing side of a dollar-sterling battle for the ugliest currency award. While weaker sterling (and higher UK inflation) would undermine support for the domestically exposed FTSE 250, sterling strength would undermine the gains UK investors in the FTSE 100 have seen thus far,” he concluded.
