Super Tuesday: On 3 March, 14 US states will hold primaries for the Democratic presidential nomination.Following Senator Bernie Sander’s good start and Senator Joe Biden’s landslide win on 29 February, the field is now narrowed to a two-person race. Factors that could change the race: one of the more moderate candidates could drop out due to a poor showing; Michael Bloomberg could see a resurgence, having initially performed well and having made an enormous personal investment in his campaign; though it would be a challenge, Elizabeth Warren could become a viable populist alternative to Sanders; and an unexpected winner in California, the state with the largest number of delegates. After Super Tuesday there will be another large set of delegates awarded on 28 April on the way to the Democratic convention in July. Then, September and October will set the stage for the presidential and vice presidential debates in the run-up to the November election. Implications for financial markets:a Sanders win of the nomination would be the most challenging outcome for financial markets, as investors are concerned about the cost of his economic agenda. The healthcare sector is sensitive to the prospects of a populist nomination. A Biden win would be neutral for markets since it would not lead to the implementation of costly policies. In addition, a moderate fiscal expansion with higher infrastructure spending could be positive, but may be offset by a possible expiration of the income tax cuts. The most favourable outcome would be a Bloomberg victory since his agenda focuses on investment in education and vocational training, higher R&D spending and increased investment in rural broadband access. Possible features of Trump’s second term: from an economic standpoint, the Trump presidency has proved good, with real wages up and tax cuts supporting growth. However, there has been a growing polarisation of US society. Inequality is at its highest level for more than a century as Trump’s policies have mainly benefited the wealthiest. Trump’s proposal consists of a continuation of his policies, including an extension of tax cuts. This would reduce taxes in 2026-30 relative to what they would be in case of no extension. However, this proposal is not really new, as it has already been implicitly endorsed by the current administration. In a second term, Trump could toughen his position on trade with China and increase tariffs on European goods. The Fed will not hesitate to act forcefully in the short run in a pure risk management approach in the wake of the coronavirus pandemic. Our convictions on US assets: we believe that markets have not priced in a meaningful probability of a Sanders presidency. Assuming a Trump vs. Sanders election, markets could stabilise with an expected Trump victory, while they would face more downside risks in response to the rising likelihood of Sanders’ socialist democrat agenda. Some equity sectors (e.g., healthcare) are already under pressure and we expect that sector divergences and sensitivity to electoral noise will characterise equity performance in 2020, when the focus will move from the coronavirus issue to US domestic matters. Beyond electoral considerations, in US fixed income, US Treasuries seem overvalued following the search for safety in reaction to the coronavirus outbreak. This is expected to last for a while, as US Treasuries are proving an effective hedge during the market turmoil. There are opportunities to invest in selected corporate credits, where bearish sentiment is incongruent with fundamentals. We favour bonds that may benefit from firm domestic demand, centering on the US consumer and housing markets. Recent spread widening could provide opportunities to re-enter the markets (both IG and HY) with less stretched valuations, but investors need to be selective, discriminating between among companies that could be affected by the risk-off but have good quality (buying opportunity), and companies that could see a material default risk increase.
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