The US election is more critical for our financial markets than our own one, writes Nikki Mandow
It was an election goddammit. A landslide victory for Labour, great results for the Green Party and ACT, a demolition for National.
And the New Zealand dollar did… nothing. An almost insignificant move upwards against the US dollar over the weekend, a bit of a wiggle on Monday, but certainly nothing out of the ordinary.
And the NZX stock market? It’s closed over the weekend, but on Monday the NZX50 index did… not a lot. A little bit of a fall, but really just a continuation of what had been happening the week before.
It was all a bit odd, for a layman. Does all that election night drama mean nothing?
Pretty much. Fisher Funds’ senior portfolio manager Sam Dickie had tickets to take his kids to the All Blacks on Sunday. He watched the election like the rest of us – and then his weekend carried on. No drama. No excited buying and selling.
“It’s business as usual. A lot of companies we own have been in the portfolio through five Prime Ministers and seven or eight election cycles,” Dickie says.
What about the rise of the Greens – surely the financial markets might worry about the potential for the left having more power?
“Another cobbled together coalition? Better the devil you know.”
Markets love certainty
But why the lack of interest? Partly it’s because many New Zealand fund managers have more exposure to overseas stocks than local ones. The US market is huge. Ours isn’t.
But it’s more than that.
Daniel Kieser, managing director of equity research company Shareclarity says it’s all about surprises – or lack of them.
“All the polls leading in indicated a Labour victory. ACT 7-9 percent, Greens 7-9 percent; National didn’t poll above 30 percent too often. People knew the result already and had already priced in what it was going to be.
That’s why the election didn’t really change anything, Kieser says.
“Markets love certainty. Traders like flux, but capital markets love certainty.
“When the results came through, I said ‘OK’ and carried on with my weekend.”
Drama in the US election race
The US elections, that’s a whole different ball game, says Kiwi Wealth global equity analyst Frank Braden. And he doesn’t think that just because he grew up in Ohio.
“There’s much more uncertainty as to the outcome of the US elections. Not just who will win, but how close it will be, and will it be contested? Then there’s what will happen with the Senate race.”
Braden will be following the election closely, sitting in front of his computer. The US election date is Tuesday November 3, so preliminary indications could start arriving here around lunchtime on Wednesday 4.
And while Braden and his colleagues aren’t going to be making big changes to their portfolios, particularly if the result comes in close to what the polls are predicting, there will certainly be some tweaking round the edges.
Because American elections take place mid-week, markets are open before and after the poll. New Zealand traders have an advantage; our time zone means they hopefully don’t need to do an all-nighter.
Scenarios from calm to chaotic
Milford’s Mark Riggall sees various possible scenarios for the outcome, each with implications for how much disruption there will be to financial markets worldwide, including New Zealand.
In the best case scenario – that is, the least uncertain one – the Democrats get a clean sweep, Joe Biden is President and the Democrats take the Senate. Yes, corporate tax rates are likely to go up, but Riggall says financial markets have mostly already factored that in. And companies will benefit from Biden’s big stimulus package.
The second best scenario is gridlock – Biden gets the presidency, but the Republicans retain the Senate.
“It will be difficult to get anything done, and that is less positive for markets.”
More destabilising still will be if the polls get it wrong and Trump is elected. And that’s not impossible. Think Clinton versus Trump in the last election. Or the Brexit vote.
“The indications are pointing to a Biden victory, but that’s not too dissimilar from four years ago, so people are wary,” Kiwi Wealth’s Braden says. “Polls are a bit smarter than they were then, but…
“It’s exciting and a bit nerve-wracking. We like to look at investment themes that are going to play out over the next year, and it’s easier to do that in a more predictable environment.
“Personally, I want the chaos to be over.”
A contested election
A Trump victory isn’t the worst outcome however, Milford’s Riggall says. That will come if there’s a contested election, where Trump rails against the postal votes, for example, or refuses to accept a Biden victory. Where there’s no peaceful handover of power.
That’s when it will really get messy.
“A contested election will be terrible for markets, regardless of the outcome. Markets are based on three things: optimism, fear and greed. When they are fearful, prices fall, and markets could move quickly.
“That’s when you have to think about defending your portfolio.”