As the world's oldest democracy goes into election mode, stock markets across the globe are likely to witness volatility, especially the US, until poll results are out of the way. It would be interesting to see whether a Joe Biden victory in the US presidential elections would be enough to convince investors that Donald Trump is poised for defeat.
According to a report by Axis Asset Management, the signals are mixed, suggesting the result may be a close-run contest between Democratic presidential nominee Joe Biden and Republican incumbents Donald Trump. As on October 27, Trump's chance of winning re-election stood at just 35 per cent, which reduced the possibility of a contested election. Biden's widening lead in the polls is perceived as more negative for stocks (at least in the short run) than fears of higher taxes or regulation under the new presidency, it said.
As per the report, regardless of who wins in the US elections, investors should be careful not to make investment decisions solely based on the polls verdict. On average, there is very little difference in long-term equity returns whether the Republicans or Democrats are in power, it said.
"Presidents do not operate inside a vacuum and there are many other factors that can influence markets such as valuations, interest rates and inflation, among other things," it noted.
US elections and Indian markets
Historically, Indian markets react to global events, but longer term performance of Indian equities has been based on the performance of the domestic economy rather than international forces. Analysts at Axis Asset Management suggested that Indian equity investors may use any short term market volatility resulting from the US election results to invest with a 3-5 year investment horizon.
In case of Indian stock market, irrespective of whether Trump or Biden win, investors are likely to stay bullish as India is likely to benefit from improved relations with the US as both countries attempt to neutralise the rising power of China, according to Viram Shah, Co-Founder and CEO, Vested Finance.
"A Biden victory could bode well for sectors such as renewable energy, cannabis and education whereas a Trump victory will help sectors such as oil, defense and infrastructure perform well," added Shah.
Hitesh Jain, Lead Analyst - Institutional Equities, YES SECURITIES, said that the deadlock over the US stimulus package will dominate eyeballs, however, he thinks that Democrats and Republicans will eventually ink a deal given the rising labour retrenchment and risks to the consumer spending.
"On the US dollar, we see greenback losing ground against the basket of currencies as President Trump returns to the White House and expectations of stimulus negotiations materialise into a deal," Jain added.
The 'Biden trade' has started to outperform
Analysts at Axis Asset Management said that stocks that are expected to benefit under the Biden regime have surged as his lead in the polls has widened. Many investors expect the big tech stocks that have powered the market rally this year to come under stricter regulatory scrutiny under a Democratic president, they said.
Banking stocks, which represent a large component of value indices, are likely to profit from a stronger economy, especially if accompanied by higher interest rates. The issue is that banks are likely to face a tougher regulatory regime under the Democrats as well, noted Axis Asset Management report.
Voting for the 59th US presidential election is being held on November 03, 2020 where vote will be casted for presidential electors for the Electoral College. These electors, in turn, will vote to choose the new president and vice president on December 14, 2020.