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10.03.2020 20

The Democratic race to nomination and implications for markets

Published March 10, 2020

< 5 minutes

< 5 minutes

The essential

  • Key takeaways from Super Tuesday: The race to Democratic nomination has boiled down to two candidates now, Joe Biden and Bernie Sanders with Biden being the new front runner based on delegate count, market expectations and national polls. The turnout continued to be heavy in a number of states, most notably in Virginia, which saw turnout surge 52.5%. Arguably, Trump is the best turnout operation for the Democrats. Our analysis of exit polls shows that 35% of Super Tuesday voters want to vote for a candidate that agrees with them on issues, versus an overwhelming 61% that want to vote for a candidate that can defeat Trump. This trend continued in March 10 primaries. Consolidation of moderate candidates also seems to have benefitted Biden. It appears the dropping out of Pete Buttigieg and Amy Klobuchar and their endorsement was an important factor behind the late-Biden surge in Maine, Massachusetts, Minnesota, Texas and Virginia.
  • Risks of a contested and brokered convention: A contested convention is when a candidate has a lead but not a majority after the first ballot in the nomination race whereas a brokered convention is when a candidate fails to win a majority of the delegates after several rounds of voting for the nomination. Candidates need 1,991 delegates to win the nomination at the convention. In addition, there are 771 “superdelegates” who are not committed to a specific candidate. A convention becomes contested if no candidate receives 1,991 votes on the first ballot. In that case, the superdelegates can participate in the voting, and voting continues until a candidate is finally selected.
  • Biden or Sanders: After the performance in March 10 primaries, Biden’s chances of winning more than half of the pledged delegates has now risen over 50%, greatly reducing the risks of a contested convention. We project Sanders will have around 1,200-1,400 delegates by 6 June.
  • The upcoming contests: On March 17, Florida will be the most important state race followed by the Acela Primary on April 28 when Connecticut, Delaware, Maryland, New York, Pennsylvania and Rhode Island hold their elections.
  • Implications for markets: After Biden’s Super Tuesday win, equity markets rose, particularly in the health care sector. Going forward, we believe Biden has a stronger path and we expect political risk premia to continue to decline. However, we do not rule out increased election-related volatility if Sanders outperforms in the upcoming contests. We also believe that markets are under-appreciating the risks of a new party winning elections,given that the focus at the moment is on COVID-19, probability of global recession, and the damage to the US energy sector. If these concerns gain precedence for voters, the narrative for change in government will build and this would increase the likelihood of a reversal of pro-market initiatives. This, in-turn, would pressurise markets.


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