Barita Insights: Weekly Newsletter September 28, 2020

Analyst Insights

We are approximately a month away from the United States presidential election, which is an event circled on the calendars of many, especially investors. The importance of this election relative others is predicated on the fact that the incumbent president will determine economic policies for an economy that accounts for more than 20% of the world GDP. This is by far the most considerable contribution by any single economy to world GDP, China being the second-largest contributor, thus who is at the helm has broad implications. For the avid and sophisticated investor, the incumbent president will affect a lot of policies that will determine factors such as corporate taxes, eco-friendly initiatives, trade policies, economic reform towards racial inequality and much more. Historically during these periods, the potential candidates and their individual philosophies play a vital role in the outturn of asset markets.

The Schwab Center for Financial Research found that the market ended on a positive note in 17 of the past 23 presidential election years—or 74% of the time—with an average annual return of 7.1%. This year’s US election though is quite different, as the economic backdrop is smeared by the global pandemic caused by Covid-19. This pandemic which started off as a health crisis, has morphed into one of the greatest economic crisis to date. The unprecedented economic fallout requires a captain with a ‘steady hand’ at the helm to steer their economy out of these somewhat choppy waters. As such, investors are going to invest based on who they believe is best equipped to guide the economy during this period which will surely last more than a four-year presidential term. Some of the key factors that will play on investors sentiment are:

  • Quality and Quantity of fiscal support: The economic fallout has impacted both lives and livelihoods with considerable implications specifically on businesses. While bankruptcy is down 11.8% year over year as at June 2020, the level of Chapter 11 filings has had a noticeable increase, which is 5% higher than the previous year. This means that companies are restructuring their debt as lower business activities have made liquidity an issue.
  • Trade Deals vs Trade Wars: Given how interconnected the global economies are due to globalization, there is a consistent emphasis on ensuring that one’s country remains competitive both on a worldwide scale and domestically. Globalization has always threatened domestic industries, and with the current global pandemic, countries will continue to compete to be dominant suppliers.
  • Taxes and Inequality: The handling of corporate taxes will be a significant concern for investors, especially since the equity markets and corporate earnings historically benefit the wealthier class. Thus, bridging the gap between income classes by providing better job opportunities and compensation packages, while creating the avenue for diversity amongst race and gender will also be a key factor.

These are just some of the few areas that would impact investor sentiment while also determining the posture they will take (risk-on vs risk-off). The underlying factors will also decide which asset classes investors position in. But, the stance of the Federal Reserve (FED) historically and empirically has a higher impact on overall market movements versus just the US election, as the FED will utilize market tools to impact both monetary policy and aid in fiscal policy support.

Locally, the choice of the presidency has less impact on our local securities market sentiment, but it does impact the relationships our businesses may have with our largest trading partner. Foreign policy will be a key factor to be mindful of as this will determine the strength of our trading relations. Also, the foreign business environment will impact out local listed entities, as their ability to expand their operations outside of Jamaica and potentially the Caribbean will be underpinned by the macroeconomic environment of all potential markets. Thus, there are indirect implications for our domestic market, and why the upcoming election, in a Covid-19 environment, may have more weight than historically seen before.

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Written by Haughton Richards, FRM, Senior Research Analyst

Conclusions

The Schwab Center for Financial Research found that...

The Schwab Center for Financial Research found that the market ended on a positive note in 17 of the past 23 presidential election years—or 74% of the time—with an average annual return of 7.1%. This year’s US election though is quite different, as the economic backdrop is smeared by the global pandemic caused by Covid-19.

Key Factors to consider are:

• Quality and Quantity of fiscal support • Trade Deals vs Trade Wars
• Taxes and Inequality

Locally, the choice of the presidency has less impact...

Locally, the choice of the presidency has less impact on our local securities market sentiment, but it does impact the relationships our businesses may have with our largest trading partner. Foreign policy will be a key factor to be mindful of as this will determine the strength of our trading relations. Also, the foreign business environment will impact out local listed entities, as their ability to expand their operations outside of Jamaica and potentially the Caribbean will be underpinned by the macroeconomic environment of all potential markets. Thus, there are indirect implications for our domestic market, and why the upcoming election, in a Covid-19 environment, may have more weight than historically seen before.

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