Within six days the US election will (probably) be over. Serious statistical models show that the outcome may be more uncertain than pundits predict. Some of the latest polls in swing states show a pretty tight race, while some national polls show the race being a toss-up. On top of this, some “firewall” states may crumble, and if that happens we may be facing a long night. On average, the prediction at this stage is that Clinton will win the Electoral College with about 290 votes vs. Trump’s 248 electoral votes.

The US election results is one element in the evolving environment of change globally. The evolution of long term interest rates is another. To that mix we also need to take into account three more elements, namely: Developments in the EU, developments in China, and developments in emerging markets. Speaking of the latter, the events in S. Africa, the “over-achieving” Brazilian market that may burn again over-optimistic investors, and the floating of the Egyptian Pound today represent just three of emerging markets’ developments that reflect opportunities and threats for investors.

For the sake of this commentary we choose to focus on asset and sector allocation in this changing environment, placing emphasis on the US presidential election. We will address the other developments in forthcoming commentaries. So let’s start with the evolving electoral map. There are three elements that may make it more uncertain than in mid October:

 – First, is the role of third-party candidates. Indications are that Gary Johnson’s support has been cut by more than 40% (from 10% to about 6% nationwide), and that his supporters are inclined to vote for Trump. On top of this, Jill Stein’s support remains between 1.5-2% nationwide and this mostly subtracts from Clinton votes. The latter could be pivotal in a couple of swing states (and thus have a repetition of the 2000 election where Ralph Nader’s candidacy prevented Gore’s election).

– Second, the undecided voters seem to represent about 9% of potential voters, while at this stage in the electoral cycle they usually represent about 5%. If we add to this the number of new voters who usually do not vote but are tired of politicians and thus may post a vote of protest, then we have a mix that makes the electoral map quite interesting.

Third, polls oscillation may hide the true image of voters’ preferences, especially in years when one particular party in trying to hold on into the presidency. Let’s not forget that despite Eisenhower’s and Clinton’s popularity in 1960 and 2000 respectively, the particular parties lost the White House vote by a slim margin both times.

Given the above possibilities here is an initial review of potential effects on asset prices and particular economic sectors:

A Clinton win (especially a narrow one) with the House be controlled by Republicans (and taking into account Speaker Ryan’s aspirations) has very low chances for even a moderate fiscal stimulus. At least two sectors may be facing additional regulatory burdens and scrutiny, namely pharmaceuticals and financials, thus we may see some declines in those sectors. Overall, the equities market will probably enjoy a boost by a Clinton win, while the bond market may be going sideways with a slight higher probability of yields approaching the 1.95-2.10% range.

A Trump victory may be followed by a moderate market selloff. Contrary to a Clinton victory, financials and pharmaceuticals could do better than the market. At the same time, the Fed may hold off any interest rate increases until the market clears. We also expect that exporters will suffer and along with them major multinationals whose bottom line depends on exports. Overall, globalization will be questioned, the defense and real estate sectors will be boosted, infrastructure firms may have a party, and we expect the dollar to strengthen. A Trump presidency may hurt municipal bonds given that their tax advantages may decline if his tax reforms go through. Overall, we expect Treasury prices to increase immediately after such win, as investors put on a risk-off hat. However, in the medium term yields could steepen given the fiscal stimulus that a Trump presidency will push for.

Geopolitically, we expect that the EU will face greater challenges given the alliance between a Trump presidency and Euroskeptics, and may start feeling anew existential threats and questions. Overall, we expect EU markets to experience challenges at least in the beginning of a Trump presidency. At the same time, relations with nations such as China and Mexico may go through some volatile times and therefore, the expectation is that a Trump win will ring the alarm bells for emerging markets. A Clinton win while not as disruptive as a Trump win, does not imply that EU, China and other emerging markets will experience a rejuvenation (especially the EU and China with their endemic problems).

Real assets such as precious metals are expected to do well in the medium term under either presidency when safe havens and hedges are sought for when serious problems start resurfacing.

Happy Voting!