US election: short-term volatility in global markets a given – economist

With the US election happening next week, a US economist warns that short-term volatility is a given, but despite the hype around the widely publicised build-up, analysts and high-profile investors are downplaying the impact of the election outcome on global markets.  

But will the ripple effects be large enough to affect global growth forecasts? Dr Larry Hatheway, chief economist and co-founder of Jackson Hole Economics, says a period of prolonged volatility and perhaps some shake out of global capital markets would have some impact on economic activity.

“However, if the period of uncertainty and the potential of market volatility is contained, it does not need to have longer-term economic effects.”

Hatheway was speaking at the most recent PSG Think Big webinar on the US election race and what it may mean for global and emerging markets. He said anxieties around the impact of the US election centre around the fact that there will likely be a very close, contested election.

“We will also potentially see lots of litigation and possibly even some violence or ‘non-normal’ behaviour among the electorate and politicians.”

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Volatility in markets can linger until after election

Hatheway believes this could linger well into December with the outcome of the vote only certified on 16 December. “Uncertainty is typically the enemy of markets, so it would not surprise me if we saw some volatility, particularly given how rosy market conditions have been in the run-up to the election.”

Where does this leave emerging markets and South Africa? Hatheway says this has always been Donald Trump’s election to lose, which has ramifications for developing economies like ours.  “Emerging markets are intrinsically tied to the fortunes and fallouts of the global economy and are therefore extremely sensitive to dollar prices, interest rates and global growth.”

According to Hatheway the tough period experienced by emerging markets over the last decade due to the commodity slowdown has the propensity to linger, especially in the scenario of a Trump victory.

He says under a Trump presidency, apart from the extensive domestic tax cuts which would likely play out in a Trump “clean sweep” scenario, we will likely see an increasing trend of on- and near-shoring coupled with broad-based trade tariffs. “Additionally, expenditure and the government deficit will likely increase.”

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Trump presidency can reignite inflation

All of this spells a more hawkish policy environment, which would likely reignite inflation. “Although I think the Fed will continue to ease, the larger deficits would probably slow their approach. One of the paradoxes of the Trump policy is that it would probably lead to a stronger dollar simply because of the higher interest rate environment.

“However, while this may spark a better US growth environment, Trump’s domestic, foreign and trade policies, as well as ongoing geopolitical tensions, could spell hardship, particularly for emerging economies.”

Nevertheless, Hatheway believes that there are opportunities for emerging markets. With the onset of deglobalisation, he says that there has been a transference of trade opportunities in some cases.

“For example, with the move away from China as the leading global manufacturing source, we have seen two markets picking up those pieces, namely Vietnam and Mexico. And it may be that other countries could follow that route.”

For investors focusing offshore, there will also be clear winners and losers in terms of US sectors. Hatheway says that in a Trump presidency, especially in a clean sweep scenario where Republicans have a Senate and House majority, his deregulation measures will create three clear beneficiaries: traditional energy, and pharmaceutical and financial services sectors.

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Harris administration might not have all the wins in US election

Under a Harris administration, there will be continued support for sectors like alternative energy, driven by policies such as the Inflation Reduction Act, which promotes electrification, EV adoption and solar panel use.

Hatheway explains that aside from the odds makers and the prices that follow suit, leaning toward a Trump win, there are mechanisms in the Constitution where a minority can have a majority rule.

“I don’t mean the popular vote, but via the Electoral College, as well as nuances in the Senate and House of Representatives. therefore, all these factors tilt towards a Trump victory.”

That said, Hatheway explains that if Kamala Harris wins, it is almost certain that she will face a divided government. Due to the Senate potentially flipping to a Republican majority, her legislative agenda is less likely to pass through Congress easily, if at all