While the U.S. presidential and congressional elections are months away, institutional investors aren’t so concerned about which party wins, said Calvin Tse, managing director and head of Americas macro strategy at BNP Paribas.
Rather, investors are looking to see “if there is the potential for a unified government” because “it’s typically in those scenarios that we can see much more assertive policies push through, and those various sort of policies are usually the ones that elicit a much larger market reaction,” Tse said at a news conference Thursday.
Looking at the electoral map, Tse said the likeliness of a “red wave” is more likely than a “blue wave,” adding that it will be “very difficult for the Democrats to maintain control of the Senate.” In the event that Republicans take the White House and Capitol Hill, “we are likely to see some pretty drastic moves across asset classes,” he said.
Former president and presumptive Republican nominee Donald Trump has discussed replacing current Federal Reserve Chair Jerome Powell. “It’s not the easiest to remove a Fed chair and replace him or her with someone else,” Tse said. The markets think Trump would be successful in replacing Powell, so in the event of a red wave, there will be “a very large steepening” of the U.S. yield curve.
Additionally, Trump favors huge increases in tariffs on the rest of the world; thus the U.S. will become “much more competitive” when it comes to foreign exchange, leading the U.S. dollar to rise.
“The combination of tariffs plus higher yields plus stronger growth points in one direction, and I think we can see this dollar bull market extend for quite some time in the event” of a Trump victory, he said.
Looking back at Trump’s 2016 victory, Tse noted that the equity market rallied “very significantly.”
On whether equities continue going higher, he said that the one thing he would caution about is “that we’re in a very different place,” noting that the S&P 500 was trading at about 16 times for one-year forward earnings in 2016, whereas today they are getting closer to about 22 times, and valuations are now “quite rich.”
In a red-wave scenario, the main policy Tse forecasts would impact the equity market is one that affects corporate taxes, since earnings and taxes are “everyone’s biggest expense” and have “one of the largest impacts on what your bottom-line earnings look like.”
“In the event that corporate taxes are cut — as is currently promised on the campaign trail — we think that could be a potentially pretty large positive catalyst in the S&P 500,” Tse said.