At this time, in the United States, voting is under way which will lead to the election of the next President. An election that, as always, will have significant repercussions for the financial markets.
In the short term, the worst-case scenario, only partially discounted by the financial markets, is that of a “contested result”. Long voting counts in several states, strong disagreements over who actually won, and potential social tensions, that could last for several weeks, after November 3. In this scenario, in a market already struggling with the rise of the contagion curve and the new lockdowns in both the USA and Europe, there would be significant volatility.
What will happen once the result of the election has been established? The priority of the candidate who will be victorious, regardless of which one it is, will move from the goal of winning the election to supporting domestic demand and economic growth. Through very strong fiscal stimulus. The modalities of this intervention may differ in both cases. If Trump wins; trying to avoid lockdown at the state or local level. If Biden wins; giving preference to transfers to local governments and low-income families. But either way, the winner of the election will desperately try to start a robust economic recovery in early 2021.
The success of this attempt will depend very much on how much the new administration will be able to accompany the fiscal stimulus with targeted and preventive interventions also at health level. In order to improve the confidence of families and businesses even before a vaccine is made available. Without promises of miraculous solutions.
In this case, we will also see a recovery in investor confidence in growth, not only in the US but globally. But beware: we will have an increase in the public deficits of developed countries to levels that we have not seen, since the post second world war period. This will finally lead many investors to question their sustainability. And the question is how much longer central banks will be able to keep government bond yields anchored at current levels, very low if not negative. Investors must take this risk into account now and should therefore look at an asset allocation very different from the traditional one.
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