EM Winners, USD Loser Of US Elections

Joe Biden’s win – and a negligible chance of reversing that outcome – coupled with recent comments from Republican lawmakers, sets the stage for sustained US dollar weakness and the continued outperformance of emerging market assets.

Below are the main takeaways from the most recent note of UBS Asset Management’s Multi-Asset Strategy team (UBS):

Election outcome

• “This scenario [Biden win, divided Congress] is likely to result in sufficient fiscal support for an economy still facing pandemic-induced headwinds, although less than would have been the case under a united Democrat government. The incoming president is likely to pursue a more predictable foreign policy. Major tax increases that would have been a part of the full set of ‘Blue Wave’ policies can be largely ruled out, in our view.”

Market implications

• “Now that the relief rally has seen investors price out some of the negatives that may have accompanied a ‘Blue Wave’ or highly disputed, inconclusive election, underlying trends that were in place before the election are poised to resume.”
• “The ongoing normalization of the global economy and expected development of a trusted, effective vaccine are shaping up to be the dominant features of the macroeconomic and market backdrop in the months to come.”
• “While the lack of a clear Blue Wave failed to spark a swift procyclical rotation, we believe that the presence and proximity of these catalysts bodes well for the sustained success of this trade set over time as the expansion progresses.”
• “The forward earnings outlook points to stronger profit growth for the broader US market relative to tech-heavy Nasdaq 100 Index (NDX) in the coming year, which informs our bias towards value, procyclical stocks. US small caps, which have the most leverage to the improving domestic economy, should also outperform their larger cap peers.”
• “We have the highest conviction in sustained dollar weakness and the outperformance of emerging market assets. A diminished threat of tariffs under the incoming administration should reduce much of the protectionism discount in foreign currencies and reverse prior US dollar strength. The lack of an aggressive fiscal impulse stateside will keep real yields subdued, in our view, also contributing to a broad downdraft in the dollar. We deem a broad swath of emerging market assets – from foreign exchange, to equities, to dollar-denominated debt – to be particularly attractive in this backdrop.”

The full report is available on the UBS website here.