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31 Oct, 2016 11:54

Markets brace for ‘black swan’ impact of US presidential election

Markets brace for ‘black swan’ impact of US presidential election

The reopening of the FBI investigation into Hillary Clinton's emails may result in a surprise outcome of the US presidential election on November 8, which could shock global stock markets worse than any ‘black swan’, Citi analysts warn.

“With huge uncertainty around the outcome and the consequent shape of economic and political policymaking, many asset prices are likely to see increased volatility. This, in itself, could provide a considerable headwind to growth,” analysts at the bank said in a note.

A ‘black swan’ event is a metaphor used by the investment community to describe an event that comes as a surprise, such as the crash of the US housing market in 2008.

Last week, FBI Director James Comey announced plans to “take appropriate investigative steps” and review the new information concerning emails sent by Hillary Clinton via her private email server during her time as Secretary of State.

Either a victory by Republican Donald Trump or a Clinton triumph might become the biggest shock that would force investors to search for safety in government bonds, the Japanese yen and US dollars, fleeing from riskier equities and emerging markets, according to analysts.

Both presidential nominees plan to increase spending and cut taxes. The step would be bullish for stocks and bearish for fixed income. Analysts say the situation could turn out to be the blackest of black swans in this quite unpredictable election year.

“Valuations of US equities are quite high, and a Trump victory will trigger a massive selloff,” said Margaret Yang, a CMC Markets analyst as quoted by Bloomberg.

Trump’s shifting policy positions make his longer-term impact on particular sectors harder to assess. Banks, insurers and drug makers are expected to do better should a Republican win, according to analysis by US-based investment management company BlackRock. Almost all sectors of the health care industry might also benefit under Trump, the report adds.

Civil infrastructure corporations as well as military contractors would have bigger opportunities for government work with a Republican in the White House.

“Any upside will be limited if Clinton wins,” CMC’s Yang said, stressing that the market had already priced in her victory.

Finance and drug companies might become the biggest losers, Bloomberg reports. Tougher rules as well as tax changes might have a negative impact on Wall Street banks Goldman Sachs and JPMorgan, according to a report by Morgan Stanley Research.

“A potential Democratic sweep would represent one of the toughest election outcomes for banks,” the report reads.

Shares of pharmaceutical and biotech corporations “could be hit by renewed pressure to curb price increases on drugs,” according to the data from BlackRock. The analysts explain the projection by Clinton complaining about rising prices.

At the same time, Medicaid providers and hospital operators may benefit from continued Affordable Care Act subsidies, the analysts say. The Democrats’ plan to reduce dependence on fossil fuels could boost alternative energy producers.