Who will win the US election and how would it affect you?

What do we need to know for the week ended on 1st Nov 24

---

💡 Highlights: 💡

• UK Chancellor Rachel Reeves' budget introduced a £40 billion tax hike and increased public borrowing, placing a significant burden on businesses and wealthier individuals.

• Ahead of the US election, the equity market showed mixed performance, with tech earnings and inflation data contributing to investor caution and tempered rate cut expectations.

• The Bank of Japan (BOJ) maintained its policy rate at 0.25% on Thursday, a move that met expectations amid heightened uncertainty surrounding Japan's fiscal and monetary policies due to a recent political shake-up.

• WTI crude oil rose to $69.5 per barrel, driven by geopolitical tensions in the Middle East and speculation about potential OPEC+ production adjustments.

US Market Insights

In the lead-up to the U.S. presidential election, markets displayed mixed performance driven by earnings reports and economic data. Thursday saw the S&P 500 and Nasdaq decline, impacted by weaker-than-expected results from Microsoft and Meta, while the Dow fell over 300 points. Meanwhile, the Personal Consumption Expenditures (PCE) inflation index rose by 2.1% annually in September, meeting expectations but failing to shift market sentiment significantly. The ISM manufacturing report added concerns, showing further contraction in factory activity, but an unexpected increase in prices, fueling speculation of a less dovish Federal Reserve stance.

As investors brace for the dual impact of the election and the Federal Reserve’s upcoming policy meeting, volatility remains high. Aggressive expectations for rate cuts are being scaled back as economic data, such as the unexpected drop in weekly jobless claims and 2.8% GDP growth for Q3, underscores resilience in the U.S. economy. The Fed is expected to take a cautious approach, with markets now pricing in only 40 basis points of cuts for the remainder of 2024—down from 80 basis points anticipated in mid-September.

Wage data from October added to the picture of economic resilience, with average hourly earnings rising 0.4%, slightly above forecasts. This resilience has led analysts, like Bank of America's Shruti Mishra, to argue that while cuts are likely this year, stronger activity could prompt the Fed to pause in early 2025 if Treasury yields stabilize near 4%.

The upcoming week presents significant events, including the U.S. presidential election on Tuesday, a Federal Reserve meeting, and key economic releases such as ISM Services PMI and non-farm productivity data. Earnings season will continue, with a shift in focus to large- and mid-cap companies. The election outcome is expected to have far-reaching implications, with healthcare, automotive, and manufacturing industries particularly affected by policy directions.

For instance, Trump’s “America First” agenda could revive tariffs, raising costs for industries dependent on imports, while a Harris presidency may bolster electric vehicle incentives. Additionally, healthcare could see substantial changes depending on the election outcome, affecting insurers like Centene and UnitedHealth.

Recommendations

For investors currently holding long positions in the VIX (CBOE Volatility Index), next Tuesday could mark a key turning point. As markets digest the U.S. presidential election results and the upcoming Federal Reserve policy announcement, volatility is expected to be high in the lead-up. However, once these events are past, the uncertainty surrounding them may subside, potentially leading to a drop in volatility.

This shift creates an opportune moment for investors to consider shorting the VIX after Tuesday, as the likelihood of decreased volatility could reduce VIX levels.

According to the sector, investors may refer to this table below for more information:

Sector	Election outcome	Investment Focus	Strategy
Healthcare	Trump Victory	Focus on healthcare firms with private-sector contracts and minimal federal program reliance	Take a long position after the election for companies less reliant on federal funding and hold it until Q1 2025 for post-election rally.
	Harris Victory	Emphasize healthcare providers benefiting from expanded federal healthcare programs like Medicaid	Invest in insurers and technology firms with high federal exposure for potential growth and hold it until Q1 2025 for post-election rally.
Automotive	Trump Victory	U.S.-based manufacturers and suppliers benefiting from domestic production incentives	Automotive stocks may experience a rally if the administration announces favorable policies, such as tax breaks on EVs or incentives for domestic manufacturing.
Short-term investors can take a long position in companies like Tesla, Ford, U.S.-based Auto Parts Manufacturers and hold it within 3 to 6 months after policy announcements or any immediate rally tied to new tax breaks.
	Harris Victory	Companies in the EV and clean energy space benefiting from federal tax credits	Short-term investors can take a long position in Tesla, Rivian, General Motors, ChargePoint and hold it within 3 to 6 months after policy announcements or any immediate rally tied to EV incentives.
Manufacturing	Trump Victory	U.S. manufacturing and defense contractors expected to gain from tariffs and defense spending	Investors may consider taking a long position in industrial machinery and defense sectors. Given the tension in Middle East and Ukraine, investors can hold these stocks till Q2 2025.
	Harris Victory	Green energy and sustainable practices in manufacturing, benefiting from green infrastructure initiatives	Investors may consider clean energy and industrial tech firms. If policies promoting domestic manufacturing, infrastructure investment, or favorable trade adjustments are implemented, taking a long position in this sector and hold it for a longer duration (1-2 years) can capture the gains as policies take effect, leading to increased production, hiring, and demand.

---

UK Market Insights

In a bold move, UK Chancellor Rachel Reeves announced a sweeping budget overhaul that includes the largest tax hike in a generation, a £40 billion tax rise, alongside £28 billion in annual borrowing. The budget introduces a significant spending increase of £70 billion for 2026-27, about 2% of GDP, marking a dramatic shift aimed at supporting public services and economic growth. A large portion of the budget’s funding will fall on businesses, with a £25 billion increase in employer National Insurance contributions, although the Office for Budget Responsibility (OBR) suggests much of this tax burden may ultimately shift to workers through lower wages. Wealthy Britons will also feel the impact, with new taxes on private equity, second homes, private jets, and private schools, as well as the elimination of offshore trust benefits for inheritance tax purposes. The OBR estimates these tax reforms will raise £12.7 billion over the next five years.

Financial markets reacted strongly to the budget. Government borrowing costs surged to a five-month high as investors were reportedly surprised by the scale of the proposed borrowing. The 10-year gilt yield, a key indicator of government borrowing costs, rose sharply. Meanwhile, the FTSE 250 index saw gains, rising by as much as 1.7%—its largest single-day gain since July—before settling with a 0.4% increase. The budget’s focus on supporting smaller companies provided a degree of certainty and optimism for some investors, particularly in the mid-cap sector.

The budget also touched on housing, pledging £5 billion to support home construction and increasing the duty on second home purchases. The additional tax on second homes may temper demand in the buy-to-let and vacation home markets, potentially easing competition for first-time buyers. However, net borrowing for mortgage debt in the UK fell to £2.54 billion in September, lower than expected, suggesting a softening in the housing market despite continued growth in net mortgage lending, which rose to 0.9% from 0.7% in August.

Recommendations

Investors may see opportunities in sectors likely to benefit from increased public spending, such as infrastructure, health, and education. However, the higher tax burden on businesses and the prospect of wage pressures from employer tax hikes could weigh on corporate profitability, particularly for larger firms. Mid-sized companies, as reflected in the FTSE 250’s initial rally, may continue to attract investor interest due to targeted budget support and sectoral certainty.

In the real estate market, the increased duty on second homes may create headwinds for buy-to-let investors, potentially favoring first-time homebuyers as demand moderates. Meanwhile, as the gilt market adjusts to rising yields and a more cautious rate-cut outlook, bond investors may need to weigh the balance between potential returns and the volatility introduced by new borrowing requirements and inflation expectations.

Investors in corporate bonds, particularly in sectors hit by tax hikes, could use CDS to hedge against rising default risks as companies may face profit pressures under the new tax regime.

---

EU Market Insights

European Central Bank (ECB) President Christine Lagarde affirmed on Friday that the eurozone's disinflation trajectory remains on course, although she cautioned that wage pressures continue to pose risks. Speaking at the International Monetary and Financial Committee meeting in Washington, Lagarde assured that consumer price deceleration "is well on track" despite potential headwinds. This statement comes after the ECB implemented its third interest rate cut of the year, and officials are now deliberating whether an even more substantial cut might be appropriate when the ECB reconvenes in December.

The eurozone economy has shown resilience, with third-quarter GDP growth at 0.4%, surpassing the 0.2% growth expected by analysts, a positive indicator for the ECB’s gradual monetary easing strategy. However, underlying economic concerns persist, and upcoming data will likely influence future policy decisions.

Next week, major interest rate announcements from central banks in the UK, Australia, Brazil, Poland, and Norway are anticipated, all of which could shift global monetary dynamics. In Europe, investors will keep a close watch on Germany's industrial production, factory orders, and trade balance, as well as the manufacturing and services PMIs for Spain and Italy. Additionally, the Euro Area’s retail sales data will offer further insights into consumer behavior and economic strength across the region.

These indicators will provide a clearer picture of the eurozone's economic health and may influence the ECB’s decision in December, particularly as the central bank weighs additional measures to sustain growth and curb inflation.

Recommendations

Investors with a positive outlook on the eurozone economy can consider increasing exposure to European equities now, especially in rate-sensitive sectors like real estate and consumer discretionary, which may benefit from further ECB rate cuts. Therefore, holding these equities until Q1 2025 is recommended.

Given persistent inflation concerns and mixed economic indicators, it's wise to balance bullish positions with exposure to more defensive sectors, such as healthcare and utilities, which tend to perform better in uncertain economic climates.

Source: CNBC, Bloomberg, FTnews and Reuters.

Market Indicator - 1 Nov 24

Disclaimer

The content on this website is for general informational purposes only and does not constitute financial advice. No liability is accepted for any loss or damage arising from reliance on the information provided.