Global markets are nervous as the U.S. presidential race narrows. The U.S. declares election results state-by-state. Some states already lean toward Trump or Harris as votes are tabulated.

 

This time, the knife-edge race in several states may slow media coverage of a winner. Legal issues are also possible, with over 100 Republican-led pre-election lawsuits challenging voter eligibility and management. 

 

Early vote numbers may not indicate the winner in a close contest. If we look at history, Trump led some important states on election night in 2020. After Pennsylvania's result became obvious four days after election day, US TV networks declared Joe Biden the winner in 2020.

 

Voters waited less in other recent elections. In contrast, the 2016 election saw Trump's victory confirmed just hours after polls closed, and Obama's 2012 re-election was projected before midnight. However, the most notable was the 2000 race between George W. Bush and Al Gore, which remained unresolved for five weeks, with the U.S. Supreme Court eventually halting Florida's recount to confirm Bush's win.

 

A similar dynamic might occur this year, possibly with an initial "red mirage" in Trump's favor or a "blue mirage" initially favoring Harris before shifting back.

 

If markets could talk, they'd tell you they're already partially pricing in a Trump victory. Though all opinion surveys have shown that the race will be historically close, prediction markets have predicted that Trump and his tax-cutting and tariff-hiking plan will win handily.

 

Wall Street has also seen a surge in gambling activity as pro-Trump sentiment supported small-cap stocks, inflation-sensitive interest-rate bets, and cryptocurrencies. The extent to which a Trump triumph is already priced in is difficult for investors to ascertain.

 

Of course, investors have been caught off guard from the Brexit referendum to the shock of the 2016 U.S. election in recent years. But, no matter who is in the White House, risk-taking bulls can find solace in the robust U.S. economy and the accommodating Federal Reserve.

 

The outcome of the U.S. election will have a significant impact globally, from Ukraine and the Middle East to world trade. A deeper realization is also taking hold - even if Washington doesn't call all the shots anymore, it still calls plenty.

 

This year's election brings distinct outcomes, with former President Trump and Vice President Harris representing polar economic philosophies that promise contrasting impacts on markets worldwide. For the rest of the world, the shorthand of the U.S. presidential race has been that Kamala Harris represents continuity and Donald Trump chaos.

 

A Trump win is widely expected to fuel "protectionist" economic policies, including steep tariffs and incentives for U.S.-based manufacturing, which will likely pull foreign capital back to U.S. shores. For India, this could mean sustained foreign portfolio outflows, a stronger dollar, and renewed pressure on the rupee.

 

Trump's policies may elevate U.S. Treasury yields, potentially triggering capital outflows from emerging markets as dollar-denominated assets grow more attractive. Trump is seen pushing through his tax-cutting and tariff plans, widening the fiscal deficit and re-fueling the inflation era.

 

A Harris administration might emphasize continuity with Biden-era policies, such as support for renewable energy and trade with protective measures. Although regulatory oversight could increase, sectors like clean energy, electric vehicles, and healthcare might see significant gains, favoring companies in these fields.

 

Notably, both Republican and Democratic victories have had a favorable impact on stock markets. The market has historically benefited in the short term from the majority of election outcomes. The stock market has reacted favorably to Obama, Trump, and Biden's wins in the last three presidential elections. But regardless of the election's outcome, the underlying macroeconomic indicators in the United States are currently significantly weaker, which could cause turbulence in international markets.

 

With both candidates likely to inherit an economy facing inflation and fiscal challenges, bond market volatility is expected to remain high in either scenario. The bond market fear gauge is at twice its normal election-time level.

 

Many people believe that a Trump victory would increase inflation. Expectations that the central bank will significantly lower interest rates in the future have been complicated by the fact that the major yield surge occurred when the race was intensifying and corresponded with better-than-expected U.S. economic data. If the robust economic data was the primary driver of the recent bond meltdown, which was the worst in two years in October, then a Trump win may pave the way for much greater drops.

 

The so-called breakeven rate, which gauges investors' inflation expectations, is another important matrix to keep an eye on. The difference between five-year Treasuries and inflation-linked bonds, known as the five-year breakeven rate, has already risen from less than 1.9% in early September to 2.4%.

 

Trump has proposed tariff hikes of up to 60% on Chinese imports and potentially 20% on all other imports. His uncompromising stand on higher import tariffs and tax cuts for American corporations may benefit U.S. markets, but emerging markets may feel the pressure.

 

Such a move would pressurize global trade, reshaping currency dynamics and potentially diminishing China's exports. Although China could be the focus of its stand on tariffs, India may also feel the effects. Moreover, his 'Make in USA' and anti-China stance on tariffs would be inflationary, delaying the FED rate reduction beyond what has already been done.

 

Trump's support for a "crypto-friendly" regulatory environment may benefit digital assets. Simultaneously, Harris's policies may provide stability and encourage crypto sector growth, albeit with more stringent regulations.

 

The overall outflow from emerging markets is evident. From the perspective of emerging markets, foreign investors withdrew a significant Rs 94,000 crore from the Indian stock market in October, marking the highest monthly outflow on record. In November, the trend continued, as foreign institutional investors sold equities valued at Rs 4,329.79 crore on Monday.

 

Following the stimulus, China experienced significant financial inflows, totaling approximately $53 billion within two weeks. Still, in the final three weeks of October, China experienced capital outflows totaling nearly $15 billion.

 

Mexican funds have experienced outflows due to concerns regarding a potential return of Trump to the presidency impacting that market. Emerging markets in Latin America and economies in Asia have experienced capital outflows. It is a global phenomenon. Where is the money going? It has been going into U.S. markets and Japanese markets.

 

Remember, higher-than-expected inflation suggests increased treasury yields and a robust dollar, negatively impacting emerging markets.

 

My dear readers, the play isn't about obvious moves (like broad market exposure) but second-order effects. Think supply chain restructuring, domestic manufacturing, and inflation-protected real assets. Now is the time for strategic positioning. Consider Geographic Diversification 2.0, beyond simple country allocation, focusing on supply chain positioning and strategic technology access.

 

In the short term, consider bolstering positions in sectors less affected by FII outflows, such as technology, infrastructure, and domestic consumption. These industries could offer insulation from currency risks and remain appealing even as global capital flows fluctuate. Diversifying into sectors that benefit from protectionist policies (like U.S. small-cap stocks) may also provide a buffer.

 

It is still not too late to conduct Portfolio Stress Testing against both election scenarios. The winners will see these changes not as risks to be avoided but as opportunities to be seized. Your wealth's future depends not on predicting the winner but on positioning for both possibilities while capturing the underlying shifts that will happen regardless of the outcome.

 

In an ever-changing world, staying adaptable and informed is your greatest asset.

 

Best Regards
 
 

Dr. Tarunika Jain Agrawal Ph.D. 

Alpha Research

 

 

Disclaimer

The above views are our expectations of the economy, market and investments. The views may or may not play out accordingly. You are requested to do your own due diligence before making any investment