The 5 scenarios that everyone is talking about

Elections might not usually be top of traders’ agendas but the US elections are!

The upcoming US elections are focal for the global economy this year, as COVID-19, geopolitics, trade wars, Brexit and the economic recession have added new dimensions to this election and more precisely how the government will be formed. However the key element is not solely who will win the race but also whether the final formation of the government will be a divided or a unified one.

The key question is how the new government type could impact the US economy and the global markets.

The government formation is crucial as it will be used as an indicator of future policies both domestic and foreign. In regards to the rest of the world, the outcome of the 2020 elections will be of great importance for Asia, following the tough stance of the Trump government on China the past 2 years, as the overall approach and focus of the US-China relationship will likely differ by candidate. Beyond the US-China tensions, the major changes proposed by the Biden campaign to domestic taxation, investment and regulation would reverberate around the region.

Hence this article focuses on all the possible post-election paths based on Morgan Stanley’s US Public Policy Research team investigation, which aims to help investors efficiently interpret every potential outcome of the US elections. The report presents five key things that you need to have in mind:

2. Fiscal expansion could be the outcome if we see one party gaining full control, i.e. White House, Senate and House of representatives. However, this is an extremely impossible scenario as a limited control of Congress is expected to be gained. Hence this suggests that the legislative power would be restricted to those preferred by consensus within the controlling party.

3. The election will act as a catalyst for the economy as a whole but also per sector, since voting is expected to be determined by what kind of fiscal stimulus could be used in the years ahead to mitigate pandemic economic corruption. Biden’s policy platform ıs more progressive than Trump’s. The reality of Biden’s policy proposals stands in sharp contrast to the campaign that has positioned him as a centrist Democrat. His platform reflects the triumph of the progressive left and could mark a substantial increase in the size and scope of the federal government.

4. Investors may misread the “Blue Wave.” The odds of a possible democratic unified government are top in forecasts. Hence the market could be seen pricing in this scenario. According to Morgan Stanley Research team, those who see a Biden win as bullish could be disappointed if the market rallies in consumer staples and machinery stocks stall on a China policy that could wind up relatively unchanged. On the macro side, a Democratic sweep may result in demand-side stimulus policy, which could have a meaningful multiplier effect for economic growth.

5. Geopolitics could persist with tension between the US and China rising. Taking into consideration the stance of both candidates in regards to the trade relationship with China, Biden win doesn’t represent a substantial adjustment to US-China policy.