Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

If you experience any difficulty in accessing Forsyth Barr Focus,
please call 0800 367 227, or e-Mail for assistance.


Trumped in 2020

2020 no doubt will harbour its share of surprises. One thing we can pen in our diaries, however, is the US elections on November 3. This will see President Trump face the ballot box for the first time since 2016.

What is at stake? A good deal. US election results are closely watched for their market impact, which is typically felt around the globe. Moreover, US politics has become increasingly divisive in recent years, so a change in the Presidency would be a seismic shift. Yes, Donald Trump leaving The Whitehouse would be a noisy exercise.

But his potential replacement could also make waves. Senator Elizabeth Warren, for example, a leading Democratic contender, has been described by the Financial Times as “a radical”. She is campaigning on a wealth tax and universal healthcare, both extremely polarising issues in the US.

Even before the election, President Trump must navigate his potential impeachment – itself a Constitutional minefield. This arcane process is part legal proceedings, part popularity contest, and wholly unpredictable.

Assuming we make it to November 3 without a political crisis, the election proper is looking like a tense affair. Polling is volatile and odds markets such as PredictIt give the Democratic hopefuls a slight edge as the graph below shows. But there is much water to yet flow under the bridge, and Trump has already proven he can make a mockery of pundits. In mid-2015 he was seen as a 50:1 outsider for the 2016 Presidential election (source: Business Insider).

Aside from the impeachment sideshow, what else should we watch for ahead of the 2020 elections? The famous phrase of Bill Clinton’s strategist “The economy, stupid” comes to mind. In particular, our research partners have highlighted the role the unemployment rate plays in determining US election results. Put simply, ‘jobs win votes’. With the US unemployment rate at the lowest level in over 50 years, that should benefit the incumbent, Trump.

However this good news story has been complicated by the Trade War with China adding to economic uncertainty in the Midwestern states such as Michigan and Ohio – states that are typically critical in winning the presidential vote. These states have a combination of manufacturing and farming that makes them particularly vulnerable to trade disputes. Accordingly we see it as no coincidence that President Trump has become focussed on sealing “phase one” of a trade deal with China. Failure to stabilise the trade conflict would risk increasing collateral damage to the Midwest, destroying jobs, and dramatically damaging Trump’s re-election prospects.

So where does that leave investors?

A Trump victory could be seen as “market friendly” for two reasons. Firstly, the US sharemarket has risen more than 50% under a Trump presidency with generous corporate tax cuts more than offsetting trade uncertainty. Secondly, as discussed above, a Trump win would imply reasonable job creation over 2020, and suggest at least some visibility on the path of the trade conflict.

A Trump loss would mean a new name as President and probably imply a political shift leftward, which investors would need to digest. A win by Bernie Sanders or the aforementioned Elizabeth Warren would roil markets, both having committed to some form of wealth tax, an overhaul of banks and massive healthcare reforms. Almost irrespective of policy, the attendant uncertainty would be a formidable hurdle for markets.

But more than usual, the devil will be in the detail. Moderate Democrats such as Joe Biden, Pete Buttigieg and Michael Bloomberg are proposing policies that investors would likely find far less troubling. The composition of the two other organs of power – the House and the Senate – will also be important; the new President risks being “gridlocked” by opposition control of Congress.

Either way, politics is likely to regain its place on centre-stage next year, if it ever left!

Bernard Doyle
Strategic Adviser, Wealth Management

For a printable PDF of this article click here