The investing implications of the 2016 election

Jupiterimages /Thinkstock

The 2016 U.S. election is unusually consequential. Kate Moore examines what it could mean for investors.

The 2016 U.S. election is unusually consequential. The underlying dynamics are driven by widening income inequality across the world, and a growing perception that the benefits of trade and globalization have accrued to few.

Whoever moves into the White House will have to address these issues, and the resulting policies will have important implications for investors. The BlackRock Investment Institute examines the political landscape and policy proposals from each candidate, as well as the potential investing impacts, in our new paper “A Consequential Election.” Here’s a quick look at the major investing takeaways.

Washington decision making is likely to become more fractious regardless of the election result. Divisions between and within the Republican and Democratic parties have been growing, and an outcome whereby neither party would have a significant majority in the House of Representatives is a possibility. This could make it harder to reach consensus on legislation, potentially heralding a return to the days of dramatic showdowns over budgets and the U.S. debt ceiling.

Yet corporate tax reform and increased spending on infrastructure appear to have some bipartisan support—and would be a ripe area for negotiation in a divided Congress. We could see fiscal expansion directed at improving infrastructure. Infrastructure spending should boost growth more than usual amid rock-bottom rates, in our view.

A growing backlash against free trade and immigration threatens to make economies more insular—at a time when economic growth and productivity in many countries are barely above stall speed. Emerging markets have the most to lose, especially under a victory by Republican nominee Donald Trump. Mexico is a clear potential loser given its heavy reliance on exports to the U.S.

Potential changes to income taxes would have ripple effects on U.S. municipal bonds. The U.S. election campaign suggests rising populist sentiment around the globe is likely here to stay, and we see potential changes to income taxes. These could range from changing the tax treatment of carried interest to capping deductions for charitable giving and mortgage interest. Our focus is on any moves to limit the amount of interest from U.S. municipal bonds individuals can claim as tax exempt. Either candidate could introduce a cap, in our view, which would make munis less attractive and lead to a rise in yields in the US$3.8 trillion market. We see Democratic nominee Hillary Clinton’s planned tax increases on the wealthy supporting munis, as they would raise the value of any tax-exempt interest income for individuals facing higher taxes. Conversely, Trump’s plan to slash personal tax rates could deal a blow to the asset class.

We see two sectors that could be most affected by the U.S. election: U.S. financials and U.S. health care. We see tough times ahead for many U.S. financials as the sales practices of large U.S. banks come under greater scrutiny, especially under a Clinton presidency. U.S. health care stocks could be hit by renewed pressure to curb price increases on drugs, a crackdown on large-scale mergers as well as uncertainty over a likely shakeup of the Affordable Care Act (ACA). Finally, mergers and acquisitions are set to face increased scrutiny if Clinton prevails, as her party appears to view anti-trust enforcement as a tool to boost competition and address inequality.

Our bottom line: This is an unusually consequential election that challenges the post-crisis status quo. Read more in the full paper, “A Consequential Election.”

Kate Moore is BlackRock’s chief equity strategist, and a member of the BlackRock Investment Institute. She is a contributor to the BlackRock Blog in Canada.

Past performance is not guarantee of future results. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

© 2016 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.  iSC-2547