INFORMATION FOR INVESTMENT PROFESSIONALS
US ELECTION: THE
LIKELY OUTCOMES
OCTOBER 2016
 Given their majority in the House of Representatives, the
likelihood of the Republicans retaining control there remains the
base case. The Senate will be more competitive, with Democrats
well-positioned to pick-up the seats necessary to regain a majority in
the upper chamber.
Nicolas Janvier
US Equity Portfolio
Manager
 A divided government is the most likely outcome of the election,
with Hillary Clinton winning the Presidency and Republicans
retaining control of at least one chamber of Congress (The House of
Representatives).
 Such an outcome is likely to be a neutral-to-slight positive for
markets.
Background
For most of spring and early summer the US presidential race
appeared to be very close, but with just weeks to go until the US
electorate chooses between Democratic nominee Hillary Clinton
and Republican Donald Trump, the polls indicate Clinton is edging
ahead. Indeed, the betting markets now highly favour her to become
the next POTUS.
It is worth remembering that Presidential races in the US are
decided not by the popular vote, but by the Electoral College and,
as such, it is the state-by-state tally that matters, not the national
polls.
Also, while the battle for the Presidency is understandingly grabbing
all the headlines, control of both houses of Congress is also up for
grabs on 8 November. It is therefore important for investors to
formulate a view on the potential make-up of the Legislative branch
in order to evaluate the possible government policies and the
implications for the economy and financial markets.
In this viewpoint, we examine how the election process works, what
the possible outcomes are, and the potential market impacts of a
Trump or Clinton win.
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The electoral college
The Electoral College is the process established in the constitution as a compromise between
election of the President by a vote in Congress and election of the President by a popular vote
of qualified citizens. The Electoral College consists of 538 electors. Each state’s entitled
allotment of electors equals the number of members in its Congressional delegation: one for
each member in the House of Representatives plus two for the Senators.
The Democrats tend to be strong along the larger coastal states while the Republicans
dominate the interior and southern states. The Presidential election will likely comedown to 6-10
so called “swing-states”. These are, as of late: Colorado; Florida; Iowa; Michigan; Nevada; New
Hampshire; North Carolina; Ohio; Pennsylvania; and Virginia. The latest round of state polling
now has Mrs. Clinton with a slight lead in all but Ohio. One interesting point to note is that no
Republican in history has ever tallied 270 (or more) Electoral votes without carrying Ohio.
Figure 1: Electoral college map
Source: electoral-vote.com.
After a close spring and early summer (indeed Trump even led many polls post the Republican
convention), Hillary Clinton is now decidedly ahead. While post the Republican convention in
late-July Trump’s odds hit 50% in FiveThirtyEight’s model, the bottom has since apparently
fallen out from under him (it would seem). The same model now places the chance of a Clinton
victory at over 87%. No matter the polling, however, a Donald Trump victory cannot and should
not be ruled out at this point. In short, the US remains a deeply divided country and Hillary has
proven to be quite unpopular with very high unfavourable ratings (the second highest in history
behind Trump).
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Figure 2: How the forecast has changed
Source: http://projects.fivethirtyeight.com/2016-election-forecast, 17/10/2016.
Legislative branch
Increasingly, the emerging question is: to what extent would a potential Trump victory lead to
down-ballot disaster for the Republicans? On that front, given their substantial majority in the
House of Representatives, the likelihood of Republicans retaining control there remains the
base case. The Senate, however, will be quite competitive with Democrats well positioned to
pick-up the net seats necessary to regain a majority in the upper chamber.
Possible outcomes
It is likely at this point that Clinton becomes POTUS with Republicans retaining control of the
House. In this scenario, it is more likely than not that the Democrats would pick-up the four net
seats necessary to regain a majority in the upper chamber. Such an outcome is likely a neutralto-slight positive for markets, tempering the progressive tendencies of a President Clinton on
regulation, while setting up the stage for potential compromise on issues important to investors
such as fiscal stimulus along with tax and immigration reform.
While increasingly unlikely, a Republican victory remains a possibility. If in fact the US is on the
verge of a Republican swing, it is unlikely to play out solely at the Presidential level. While
traditionally Republicans are viewed by markets at advancing pro-business, low taxation and
free trade policies, in this instance, a Republican win may be a negative for markets and
introduces great policy uncertainty. Indeed, Trump’s rise has in many ways been fuelled by his
willingness to campaign specifically against things that were once thought of as sacrosanct to
Republicans.
Beyond tax policy, Trump has provided limited detail on his policy positions and his
contradictory statements on his approach to governing leaves us guessing on how he would
govern. Furthermore, a Trump victory would signal even greater dissatisfaction with the current
political class – both Democratic and Republican – but would likely weaken current Republican
congressional leadership. Trump would likely interpret a victory as having a mandate from the
general populace to push forward with some of the more radical, anti-establishment parts of his
platform. Odds of an anti-free trade, anti-immigration policy regime taking hold in America under
this scenario increase.
Given the recent negative turn in the polls for Donald Trump and the possibility (albeit small)
that he takes Congressional Republicans on the ballot down with him, investors should give
serious consideration to an outcome that would have been almost unthinkable at the start of the
election cycle: a Democratic Sweep of the White House and both Houses of Congress.
Democrats would need to recapture 30 net seats to take back the gavel in the House of
Representatives.
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Such an outcome would be a negative (at least initially) for markets. Absent the ability of
Republicans to keep a Democratic President in check, we would likely see an executive and
legislative agenda, with greater spending funded by higher taxes, increases in environmental
regulation, changes in drug pricing and aggressive action from the Department of Justice. Odds
of a punitive tax regime against inversions and companies who relocate job overseas are high
in this scenario.
Implications for sectors
Figure 3 indicates where market impacts may fall under a Trump or a Clinton victory. However,
the key impacts are likely to be felt in the healthcare, biotech and pharmaceuticals sectors, as
seen in Figure 4.
If Clinton becomes President, but Republicans retain control over the House, current healthcare
policies are likely to continue, with the Republican house to balance the power of a Democratic
President. Under this scenario, we expect some pressure on drug pricing, but not a significant
reform. Similarly, the Affordable Care Act (ACA) will likely see some tweaks on the margins, but
is likely to continue mostly in its current form. But pharma and biotech will potentially outperform
other sub-sectors in healthcare as the headline drug pricing risk gradually fades away –
particularly in biotech given the significant multiple contraction seen year to date.
Figure 3: Sector impacts of a Clinton or Trump win
Source: Columbia Threadneedle Investments, 17/10/2016.
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Figure 4: Impacts on healthcare, biotech and pharmaceuticals
President
Base Case
Clinton
Election outcome
Senate
House
Democrats
or Republican
Key policy changes
Drug Pricing
ACA
Republican
Unlikely to see
material change
Unlikely to see
material change
Expanding
coverage
Repeal ACA
The Democratic Sweep
Clinton
Democrats
Democrats
More pressure
on pricing
Trump wins everything
Trump
Democrats
or Republican
Republican
Unlikely to see
material change
Pharma Biotech
Small Positive
(sector rotation to
Pharma/Biotech)
Negative. More
pricing pressure
Positive. Potential
less pressure on
pricing
Sector implications
Medtech
Facilities / Managed Care
Small negative
Neutral - ACA survives
(sector rotation to
(more enrolment, but
Pharma/Biotech)
lower margin)
Small positive (more
people covered
through ACA)
Small negative
(sector rotation to
Pharma/Biotech)
Small negative. ACA
expansion at the cost of
lower margin.
Negative. Higher
uncertainties. Potential
repeal of ACA
Source: Columbia Threadneedle Investments, 17/10/2016.
But if there is a Democratic sweep of the White House and both Houses of Congress, a more
significant change on drug pricing is likely (with potential consolidation of government payers)
and the chance of expansion of the ACA is higher. This works well for hospitals and medical
technology, with more patients having access to healthcare, but pharmaceutical and biotech will
experience a period of difficulty, with uncertainties on future drug pricing policies.
Should Trump take the White House and both Houses of Congress, pharma and biotech are
likely to outperform, while hospitals will potentially suffer from higher uncertainties of a repeal of
the ACA.
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