November 1, 2016 09:05 PM GMT
US Election 2016
An Election Endgame Cheat
Sheet
Polls may tighten more & outcome uncertainty rise, but our
base case is a divided government limiting policy action to
incremental tax changes & infrastructure spending. Here's
what we're watching on election night that influences our
scenarios, hedges for a tighter race, & implications for pharma.
MORGAN STANLEY & CO. LLC
Michael D Zezas, CFA
STRATEGIST
[email protected]
+1 212 761-8609
David Risinger
EQUITY ANALYST
[email protected]
+1 212 761-6494
Dara E Blume
STRATEGIST
[email protected]
+1 212 296-5786
Mikhail Levin
STRATEGIST
[email protected]
+1 212 761-8556
Mark T Schmidt, CFA
STRATEGIST
[email protected]
+1 212 296-8702
Matthew Hornbach
STRATEGIST
[email protected]
+1 212 761-1837
Spencer Chang
Closing time: Political risk is among the least definable and predictable factors
that investors face. Our election research over the past four months (see Fighting
the Fear of the Unknown) has been a search for signals within the noise that has
been US election campaigning. Hence, for our sake, and hopefully for yours, this
report is our cheat sheet on how to approach the closing days of this election
season.
Divided government still favored, but outcome
uncertainty is rising: Friday's revelation that the FBI
would be reviewing emails potentially related to the
investigation into Clinton's private server could
further tighten an already tightening race in the
coming days, but we think Clinton is likely to
maintain a polling lead going into election day.
Hence, divided government outcomes remain most
likely, limiting potential policy actions to incremental
tax changes and infrastructure spending. However, a tighter race risks markets
starting to reflect the early policy path of a Trump presidency (an 'accidental
stimulus' and more trade protections). It also de-emphasizes the risks of a
'Democratic sweep', lessening pressures on the pharma and financials sectors.
Election night – what to watch for: Some early-closing races may be a guide to
whether we are or aren't on track for divided government. An early call for
Clinton in North Carolina and Pennsylvania, for example, would point to a
Clinton win, while early calls for key House Republican races in moderate New
Jersey and Florida districts would dampen prospects for a 'Democratic sweep' and
bolster the case for divided government.
Macro hedges and pharma equity implications for a more uncertain race: A
tighter race means higher odds of a Trump policy path being reflected in key
markets. In rates, the potential for fiscal stimulus, trade protectionism, and a
change in Fed leadership makes curve steepeners and volatility attractive. In FX,
the potential for greater trade protectionism focuses investor concern on the
Mexican peso. Current USDMXN levels reflect minds divided about the election
outcome, boosting the odds of volatility on election night. Our FX team favors
USDMXN straddles and calls. One directional market positive could be in pharma
STRATEGIST
[email protected]
+1 212 296-5933
Onusa Chantanapongwanij, M.D.
RESEARCH ASSOCIATE
[email protected] +1 212 761-5672
Michael Zezas, Matthew Hornbach, Mikhail Levin, Dara
Blume, Spencer Chang and Mark Schmidt are fixed income
strategists and are not opining on equity securities. Their
views are clearly delineated.
Due to the nature of the fixed income market, the issuers or
bonds of the issuers recommended or discussed in this
report may not be continuously followed. Accordingly,
investors must regard this report as providing stand-alone
analysis and should not expect continuing analysis or
additional reports relating to such issuers or bonds of the
issuers.
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a
result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of
Morgan Stanley Research. Investors should consider
Morgan Stanley Research as only a single factor in making
their investment decision.
For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of this
report.
1
equities, where better odds of a Trump win would reduce the probability of a
Democratic Senate and/or White House. In turn, this lessens the risk of a more
severe drug-pricing regime.
2
Interpreting Our Scenarios if Polls Tighten Further
Before we summarize our potential outcome scenarios in the section that follows, we'd
be remiss if we didn't first address the revelation that the FBI discovered emails that
may be pertinent to its investigation of Hillary Clinton's use of a personal email server
while Secretary of State. Here are three ways we think Friday's news may directionally
change the outcome probabilities listed in our 'cheat sheet' in the coming days:
1. Clinton is likely to maintain a (weaker) lead into Election Day, keeping divided
government our base case: Let's assume for a moment that an average of the polls,
which encompasses different methodologies and partisan skews, is more or less
correct (see this report if you'd like to better understand our pushback on the level
of probability of a 'shy Trump' effect). Clinton had a roughly 6pp average polling
lead last week ahead of the FBI disclosure. In our view, that's a decent margin for
error, roughly double the typical polling error allowance. As FiveThirtyEight
pointed out, the last time the spotlight was on Clinton's emails via FBI Director
James Comey's press conference in July, her average poll lead dropped only about
2pp.1 As of this writing, her average lead is down about 1.5pp. Hence, we think it's
reasonable to expect that Trump will whittle away at Clinton's lead this week, but
not overtake it. 2
2. Investors may begin to perceive the key risk to 'divided government' shifting away
from a 'Democratic sweep' back toward a Republican sweep ('Trump Turns Up the
Base'), causing markets to begin pricing in the Trump policy path: It may still be
too early to see markets react to Friday's news. It may be another day or two
before we get enough polls that cover Friday's news to determine if a trend toward
a tighter race is emerging. If so, then the probability of a Trump win could jump
meaningfully. FiveThirtyEight reports that a 2pp swing toward Trump in the polls
gets his win probability up to 32%.3 Separately, but related in our view, it reports
that in three recent races (1980, 2000, and 2012) the final polling average deviated
3 points or more than the final result.4 Hence, even a slight tightening gets Trump
closer to the edge of a potential normal polling error, opening a path for victory
beyond the 'shy Trump effect', the risk of which we thought was appropriately
reflected in Trump's low polling model odds before the FBI disclosure. Such
conditions are similar to those immediately preceding the first debate, when we
argued that if the race remained tight, markets would start reflecting the potential
early policy path of a Trump presidency: fiscal stimulus and trade protectionism
(see Implications of a Tighter Race, September 26, 2016).
3. Market 'shock absorbers' may shift from micro to macro: In a 'Democratic sweep'
scenario, we argued that the main deviation from 'policy incrementalism' was a
greater policy risk to the pharmaceutical (greater potential for drug pricing
legislation) and financials (greater potential for tougher regulation) sectors (see
House Effects, October 17, 2016). The greater impact in a Republican sweep ('Trump
Turns Up the Base') is on policies that could impact macro market drivers. For
example, we think this scenario increases the probability of a tax-cut-driven fiscal
stimulus (an 'accidental stimulus') potentially biasing curves steeper over time.
The final point we offer for consideration: what could drive investors back to focusing
3
on a 'Democratic sweep' as the main base case risk? There are any number of items that
could qualify here, but the most obvious one in our view that could materialize between
now and our next publication is a new revelation about Donald Trump, be it business
dealings, personal life, etc. Such information could offset the 'suppression' efforts of the
Trump campaign by reenergizing potential Clinton voters. If the week wears on with
Trump tightening the race but no negative revelation is forthcoming, that could be a
potential catalyst for markets to begin pricing in some level of the Trump 'policy path'.
4
Cheat Sheet: Outcome Scenarios & Policy Implications
Below we summarize potential outcome scenarios, their policy ramifications, and their implied probabilities based
on most recent observations of third party polling models and betting markets. Note that this table is not
exhaustive; please see the links that follow for full detail.
Exhibit 1: A Week Away, Divided Government and Policy Incrementalism Remains Most Likely
Transformative Potential
Base Case: Divided Government
Scenario
Name
Pres. Sen. House Prob.
Policy Changes: Possible
Policy Changes: Unlikely
Key Fixed Income Market Impacts
Key Equity Views (+/-)
Clinton D
R
• Modest fiscal stimulus
• Incremental tax reform, likely corporate
49% focused
• More progressive executive appointments
to regulatory posts
Clinton
Clinton R
Survives
R
• Modest fiscal stimulus, funded by tax hike
25% • Incremental tax reform, likely corporate
focused
R
12%
R
• Comprehensive Tax Reform
• Restrictive immigration policies
6% • Meaningful fiscal stimulus
• Trade protectionism
• Trump Replaces Fed Chair
• Immigration Reform
D
• Modest fiscal stimulus
• Medicaid expansion, ACA reform
• Continued pressure on drug prices
4%
• Stricter financial regulations
• Immigration reform
• Higher minimum wage
• FX: Weaker USDMXN
• Financials (-): Potential push for stronger regulatory regime
• Tax Cuts
• Munis: Positive on higher marginal tax rates,
• Consumer (-/+): Higher minimum wage may impact retail
• Comprehensive Tax Reform potentially mixed due to risk of capped
• Pharma/Healthcare (-): Greater regulation of drug prices
exemptions
Clinton
Holds
Serve
Donkey in
Elephant's Trump
Clothing
Trump
Turns Up Trump
the Base
D
R
Democrati
Clinton D
c Sweep
• Infrastructure Spending
• Incremental Tax Reform
• Trade protectionism
• Replace Fed Chair
• Comprehensive tax reform
• Fed change or 'audit the
Fed' legislation
• FX: Weaker USDMXN
• Comprehensive tax reform
• Fed change or 'audit the
Fed' legislation
• FX: Weaker USDMXN
• Fed change or 'audit the
Fed' legislation
• Rates: Higher UST Vol
• FX: Stronger USDMXN
• Rates: Higher UST Vol
• Rates: UST 7s30s Steepener
• FX: Stronger USDMXN
• Munis: Negative based on lower tax value,
steeper curves
• Credit: Mixed due to possible loss of interest
deductibility
• Pharma/Healthcare (-): Greater regulation of drug prices
• Financials (+): Regulatory relief for small banks
• Consumer/Pharma (-): Tighter FDA Regs may impact Tobacco,
prescription drug manufacturers
• Utilities (+): Modest continued benefit to solar and wind
• Financials (+): Regulatory relief for small banks
• Energy (+): Energy to benefit from reduced, delayed EPA
regulations
• Utilities (+): Modest benefit to coal, natural gas fleets
• Energy (+): Energy to benefit from reduced, delayed EPA
regulations
• Utilities (+): Modest benefit to coal, natural gas fleets
• Consumer (-): Immigration restrictions could reduce labor
supply, consumer demand
• Financials (-): Review/"Audit" Fed
Source: Morgan Stanley Research. Note: probabilities are not inclusive of all possible election outcomes.
Telecom Services: Opportunity for Change or More of the Same? (July 14, 2016)
Tax to the Future (September 13, 2016)
Utilities & Clean Tech: Impacts Skew Positive, Either Way (July 27, 2016)
Losing Interest (October 4, 2016)
Healthcare Services & Distribution: What's at Stake? (August 1, 2016)
Consumer Retail: Implications for the Consumer/Retail Sector (September 29, 2016)
US Financials: Senate Control Key (September 12, 2016)
Energy: Implications for North American Energy (October 20, 2016)
5
What to Watch for on Election Night
President
Exhibit 2: East Coast Bellwethers on Election Night
Race
Polls Close
Pennsylvania
8PM EST
North Carolina
Given their historical vote
correlation to other battleground
states, an early call for a Clinton
win in 2 out of 3 of these states
7:30PM EST significantly boosts her chances to
win, and your chances of knowing
the outcome and going to sleep at
7PM EST
a reasonable hour.
PA
(Pat Toomey - R)
8PM EST
NH
(Kelly Ayotte - R)
7PM EST
NJ 5th
(Scott Garrett - R)
8PM EST
FL 7th
(John Mica - R)
7PM EST
House
Senate
Florida
Rationale
As moderate Republicans trying to
run at arm's length from Donald
Trump, a win for these candidates
is a potential indication that downticket Republicans did just enough
to hang on to Senate control.
According to press reports, polls
are tight in both races and the
Democratic party is investing in
their candidates to oust
Republicans in these moderate
districts. Losses for these
incumbents mean it may be late
into the night before we can
dismiss the 'Democratic sweep'
scenario.
As increasingly certain as the 'divided government' scenarios have
felt in recent weeks as Trump's poll numbers waned, last Friday's
revelation about the FBI uncovering more emails that might be
relevant to its Clinton investigation reminds us that alternative
outcomes are far from being tail risks. Furthermore, as we
outlined in the previous section, they lead to meaningful
differences in the potential path of policies that matter to key
markets.
Hence, in Exhibit 2, we focus on some early poll closings, mainly in
the eastern time zone, that could offer subjective evidence
pointing to different outcome cases. We would not shift our
assessment of potential outcomes based on these indicators
alone, but simply recommend using them as a guide to
interpreting incoming results.
Source: Morgan Stanley Research
Exhibit 3: Poll Closing Times
Source: Morgan Stanley Research, ballotpedia,org
6
Hedging for Election, Policy Uncertainty in Macro & Equities
Mikhail Levin, Matthew Hornbach, Dara Blume, David Risinger, Onusa
Chantanapongwanji, Michael Zezas
Summary
A tighter race means higher odds of a Trump policy path being reflected in
key markets.
In rates, the potential for fiscal stimulus, trade protectionism, and a change
in Fed leadership makes curve steepeners and volatility attractive.
In FX, the potential for greater trade protectionism focuses investor
concerns on USDMXN. Current prices reflect a divided mind about the
election outcome, increasing the likelihood of volatility on election night.
We favor USDMXN straddles and calls.
One directional market positive could be in pharma equities, where better
odds of a Trump win reduce the probability of a Democratic Senate and/or
White House. In turn, that lessens the risk of a more severe drug pricing
regime.
Exhibit 4: Election Hedges
Asset
Class
Trade
1 Rates
Enter UST 7s30s
Steepener
2 Rates
Buy vol on 2y1y
rates
3 FX
Buy 2 week ATM
USD/MXN straddle
4 FX
Buy outright 1m
USD/MXN calls, 20
strike
Level (L) /
Target (T)
Rationale
Risks
-
Policy uncertainty increases volatility and steepens curves (though
A decline in growth expectations as a
the direction of that steepener is not obvious to us). Risk off benefits
result of tigther financial conditions from
the most liquid point on the curve (7-yr point via 10-yr futures), while
election uncertainty
fiscal stimulus should cheapen the 30yr point.
-
An increase in volatility should be concentrated beyond the point
when Yellen's term ends. This is supported by vol being close to
Clinton wins; Yellen serves a second term.
multi-year lows, and implieds are not far above the last three months
of realized vol.
5.2%
breakeven
1.34%
Front end volatility in USD/MXN has risen, but MXN realized levels
close to we’re trading around Brexit. Currently, 2w ATM forwards
imply USD/MXN will stay within 18 and 21, but our estimates imply
that in either outcome, MXN will move out of this range.
More is in the price than we currently
estimate, and regardless of the winner,
MXN moves are subdued. This could also
happen if Banxico intervenes.
We expect USD/MXN could trade above 21 on a Trump victory, and
higher uncertainty could drive realized vol above implied. While the
Clinton wins; USD/MXN stays below 20.
cost of this insurance has gone up, we do not think it’s expensive at
current levels given the size of the moves we forsee.
Source: Morgan Stanley Research
Hedging Policy Uncertainty in Rates
Matthew Hornbach, Mikhail Levin
Enter a UST 7s/30s steepener: We continue to believe that the yield curve is likely to
steepen in the case of a Trump win. In our prior piece on the topic (Implications of a
7
Tighter Race), we discussed the potential for an 'accidental stimulus' scenario, where
protectionism remains mostly talk, but deficit-financed tax cuts come to fruition. This
scenario is likely to push up longer-term growth and inflation expectations, steepening
the yield curve. While the market is unlikely to price this scenario with full certainty,
given Trump's statements on trade, we nonetheless think that on balance longer-term
inflation and growth expectations would rise as some probability of the 'accidental
stimulus' scenario is priced immediately after a win.
At the same time, a Trump win is likely to lead to a risk off rally, concentrated in the
most liquid points on the curve (likely the 7y point via 10y Treasury futures). This
dynamic argues further for a steepening bias immediately following a Trump win.
Buy vol on policy-sensitive rates: While the steepener argument is somewhat
compelling, we are even more convinced that a Trump win would bring with it a
significant amount of uncertainty around monetary policy. Given Trump's statements on
the Fed, it seems likely that he would replace Yellen as soon as he was able. However,
we see a Yellen resignation as unlikely before her term is up, meaning that she would
likely continue to lead the Fed until January 2018. However, beyond that there is clearly
significant uncertainty over the course of monetary policy during a Trump presidency in
a post-Yellen Fed.
While the directional change in policy may be uncertain, in the aftermath of a Trump
victory, volatility around Fed policy is likely to reprice from its historically low level.
Exhibit 4 shows the volatility on 1y rates going forward, along with the minimum and
maximum levels seen over the last year. The increase in volatility should be
concentrated in rates beyond the point when Yellen's term ends (1y1y, 2y1y, etc.).
From a valuation perspective, realized volatility has been underperforming implied
volatility for the last month, though looking at the last three months of data (beyond
the most recent period of abnormally low realized vol), rates have been realizing in line
with implieds. Exhibit 5 shows implied/realized vol ratios across expiries for 1m and 3m
histories. We believe that investors concerned about a Trump win should consider
hedging by buying straddles on the 2y1y rate (i.e., options expiring in Nov. 2018, on the
Nov. 2018-Nov. 2019 rate), given that the vol is close to multi-year lows, implieds are not
far above the last three months of realized vol, and the vol should materially
outperform if Trump wins and monetary policy uncertainty is priced in for a post-Yellen
Fed.
8
Exhibit 5: Implied Vol for 1y Rates (with 1y min/max)
Exhibit 6: Implied/Realized Ratios for 1y Rates
Source: Morgan Stanley Research, Bloomberg
Source: Morgan Stanley Research, Bloomberg
Trump's Probability & Peso Volatility: Election Hedges
Dara Blume
As we highlighted in Mexico Equity Strategy & Economics: NAFTA la vista? (24 Jul 2016)
and US Election 2016: Fighting the Fear of the Unknown (12 Jul 2016), MXN is the
currency most susceptible to a Trump victory for two reasons. First, it has one of the
highest betas to risk in EM, behind BRL and ZAR. MXN had one of the largest moves in
EM following the Brexit vote, despite its lack of direct trade or financial ties with the UK.
It underperformed again after both the August 2015 and the January 2016 CNY
depreciations, again despite little direct exposure to China, or even the AxJ region. Its
beta to risk appetite alone is enough to validate a large MXN move on a Trump election.
In this particular case, MXN’s beta is likely to be amplified by the fact that Mexico does
have direct ties with the US, and trade policy could reasonably be changed by the
executive branch.
As we’ve progressed in the election, we’ve seen USD/MXN diverge from levels implied
from both USD/EM, and even more drastically, from MXN’s high-beta EM peers (see
Exhibit 6). There is clearly a correlation between Trump's odds of winning and USD/MXN
(see Exhibit 7).
9
Oct-16
Sep-16
Sep-16
Aug-16
Jul-16
Jul-16
Jun-16
May-16
May-16
Apr-16
Mar-16
Mar-16
Feb-16
Jan-16
Jan-16
Exhibit 7: MXN Trading Weaker than EM Peers Imply….
20.00
19.50
19.00
18.50
18.00
17.50
17.00
16.50
USD/EM Implied MXN
MXN
High Beta Implied MXN
16.00
Source: Morgan Stanley Research, Bloomberg. Implied levels calculated with a linear regression on changes in
USD/MXN against changes in USD/EM and a high-beta basket (including COP, TRY, and ZAR). Sample period
is Jun-14-Apr-16, and we use Jun-14 levels of USD/MXN as a starting point.
Exhibit 8: ...Likely to Be Election-Related
20.0
USD/MXN
Betfair Probability of a Trump Victory (RHS)
35%
19.5
30%
19.0
25%
18.5
20%
18.0
15%
17.5
17.0
Apr-16
10%
May-16
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Source: Bloomberg, Morgan Stanley Research
Two natural experiments offer guidance on the size of moves we can expect in MXN. The
first is the drop in the betting market odds of roughly 3-4% in favor of Clinton that
occurred around the first debate on September 26 (see FX Pulse: Yield, USD and JPY (29
Sep 2016)). The second is the headlines around the Clinton e-mail investigation on
October 28, which moved the odds 2-4%. The first incident saw USD/MXN move roughly
2% around the debate, the latter saw a 1% move in the liquid trading hours following the
headlines.
Source: Bloomberg, Morgan Stanley Research
MXN
ZAR
RUB
THB
KRW
SEK
CNH
SGD
AUD
TRY
NZD
NOK
EUR
GBP
JPY
CHF
JPY
EUR
CHF
CNH
THB
SEK
SGD
RUB
GBP
TRY
NOK
NZD
AUD
0.8%
0.6%
0.4%
0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%
-1.0%
-1.2%
CAD
CCY Change Vs USD Before and After Email Headlines (12:30 pm - 5:30 pm
ET)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
ZAR
CCY Change Vs USD Before and After Debate (9pm -12am ET)
KRW
Exhibit 10: Currency Moves Around Email Headlines
MXN
Exhibit 9: Currency Moves Around First Debate
CAD
Of course, there are likely non-linear aspects to MXN’s reaction function. A move from
90% to 100% is likely to drive a smaller move than from 40% to 50%. On the other
hand, given the surprise results we’ve seen in elections from the UK to Colombia this
year, there is probably a degree of uncertainty premium priced into MXN that will
disappear after the election. Finally, as the size of the move in the two cases above
illustrates, there is likely a time decay element to a rising Trump probability. As long as a
Trump victory remains a tail probability, a small increase in his odds may matter more to
MXN one month before the election than it does one week before the election.
Source: Bloomberg, Morgan Stanley Research
In any case, the size of the moves we’ve seen in the two isolated incidents, combined
with our limited statistical work, suggests that MXN could see fairly substantial moves
on the back of the US election. In MXN: The View from Twenty, we argue that USD/MXN
is likely to fall to 17.50 on a Clinton victory, and move above 21 on a Trump victory. Both
of these would be consistent with the results above, particularly when the
aforementioned non-linearities are considered. Moves of this size in MXN are rare but
we have seen them before around risk events that have less direct impact than this one
does. At the moment, volatility markets are pricing a 3.75% overnight move on the
10
election. We are fairly comfortable that in either result, USD/MXN would move out of
the 18/20 range, and therefore think short-dated volatility is attractive. In particular, we
would buy a two-week at the money straddle, which has a breakeven level of 5.2%. An
alternative trade for those looking to hedge a possible Trump victory are outright
USD/MXN calls. To hedge against a Trump victory, we would buy a one-month
USD/MXN call with a 20 strike, for roughly 1.3%. This implies a breakeven level of 20.3.
Pharma, Biotech Sentiment Improves if Clinton Odds Wane
David Risinger, Onusa Chantanapongwanij
Pharma-bio stocks have declined in recent days despite an initial intra-day uptick on the
investigation. On Friday, when the FBI revelation occurred, the BTK index initially spiked
on the notion that Trump's odds of winning improved.
Exhibit 11: BTK Intraday Performance on 10/28/16: BTK Initially Spiked Following the Revelation
of FBI Director Comey's Letter on the Notion that Trump's Odds of Winning Improved
3,000
BTK (NYSE ARCA BIOTECH INDEX)
2,990
2,980
2,970
2,960
2,950
Headline news hit: FBI letter
2,940
2,930
2,920
2,910
10/28/16
2,900
2,890
10:00 AM
10:40 AM
11:20 AM
12:00 PM
12:40 PM
1:20 PM
2:00 PM
2:40 PM
3:20 PM
4:00 PM
Source: Morgan Stanley Research
But fundamental US pricing concerns due to Novo Nordisk, AMGEN, Abbvie, and
McKesson guidance updates caused the sector to sell off.
Exhibit 12: BTK Index Performance over the Last Week (10/25-10/31/16)
3,100
BTK (NYSE ARCA BIOTECH INDEX) down
-3% since 10/25/16
3,050
3,000
2,950
2,900
10/25/16
10/26/16
10/27/16
10/28/16
10/31/16
2,850
Source: Morgan Stanley Research
11
We and consensus are concerned that a Clinton presidency and a Democratic win of the
Senate could result in tougher pricing environment for Biopharma. Hillary Clinton has
been an outspoken pharmaceutical industry critic since the 1990s. Clinton's prescription
drug proposals include allowing Medicare to negotiate directly with pharmaceutical
companies, allowing prescription drug importation, limiting maximum out-of-pocket
expense at $250 per month, demanding Medicaid rebates for the "dual-eligible"
population, shortening biologic exclusivity from 12 to 7 years, requiring certain amount
of R&D or rebates to support basic research, and placing restrictions/tax penalties on
direct-to-consumer (DTC) advertising. And if the Democrats take the Senate, that
chamber may be more amenable to attempting legislation on this issue. On the positive
side, Clinton's plans to expand access under ACA and Medicaid expansion, as well as a
one-time repatriation tax, could provide tailwinds to Biopharma companies.
If Clinton wins the Presidency and the Republicans retain the Senate, we would expect
the drug group to trade up. This is because the market assigns risk that the Democrats
will win the Senate, investigate the industry more, and push harder for legislation to
curtail rapid drug list price inflation.
Trump's stance is more favorable for Biopharma than Clinton's, but not risk-free.
Overall, we view Trump's propensity for limited drug pricing reform, lowering the
corporate tax rate and a one-time repatriation tax on offshore profits as policy levers
that would likely benefit Biopharma. On the other hand, Trump's policy also includes a
complete repeal of ACA and allowing for the importation of prescription drugs, which
could pose meaningful threats. In the event that the Republicans surprisingly win all
three (Presidency, Senate, and House), it could be a big positive for pharma/bio.
12
Appendix: Polling Averages & Forecast Changes
Exhibit 13: An Average of Polling Aggregates Suggests Hillary's Lead Down to 4 Points from 6
Points
8
7
6
5
4
3
2
1
0
Polling Aggregator Average (%)
49
47
45
43
41
39
37
35
Clinton - Av
Trump - Av
Clinton Lead (RS, pp)
Source: Morgan Stanley Research, New York Times Upshot, Huffpost Pollster, RealClearPolitics
Exhibit 14: Clinton's Lead Has Been Narrowing
Source
Model
University of Virginia Center for Politics
FiveThirtyEight
FiveThirtyEight
Predictwise
New York Times
New York Times
Betfair
Politico Battlegrounds Poll
Sabato's Crystal Ball
Polls-plus Forecast
Polls-only Forecast
Predictwise
National Polling Average
TheUpshot
Betting Market
Weighted Avg of 11-State Polls
Winner
Clinton
Clinton
Clinton
Clinton
Clinton
Clinton
Clinton
Clinton
Key Figure
Democrats receive 293 Electoral Votes
Clinton Favored 72.4%
Clinton Favored 74.1%
Clinton Favored 86%
Clinton: 45..6%, Trump:41.8%
Clinton Favored 88%
$0.758 to $ 0.238 Clinton to Trump odds
Clinton:46.2%, Trump: 41.9%
Change
Down 48 Electoral Votes
Clinton:-10.7%
Clinton:-12.2%
Clinton:-4%
Clinton: +0.6% Trump:+1.8%
Clinton: -1%
Clinton:-$0.09, Trump: +$0.088
Clinton: +1.3% Trump: +1.1%
Source: University of Virginia Center for Politics, FiveThirtyEight, Predictwise, New York Times, Betfair, Politico
As of 11/1/2016, change from 10/13/2016
13
Endnotes
1 Silver, N. "Election Update: The FBI is Back: This Time With Anthony Weiner." FiveThirtyEight. October 28, 2016.
2 Another way to think about this is whether this news will cause 8 million voters (about 6pp of support) to walk away from supporting her.
Per a recent Bloomberg News report, that may be the aim of the Trump campaign, as they discussed voter 'suppression' as a key goal. Using
some admittedly back-of-the-envelope rough math, per Census Bureau data, 6pp is about 8 million voters. That's about 1 in 5 white voters
who supported President Obama in 2012, or 50% of African-American Obama supporters in 2012, or all of his 2012 Hispanic voters, or
some combination across all these. To be clear, we're poll followers and not saying this number is impossible to achieve, but think it's
important to underscore how 'big' this event would have to be to change the base case and make Trump the new favorite.
3 Silver, N. "Election Update: The FBI Is Back - This Time With Anthony Weiner." FiveThirtyEight. October 28, 2016.
4 Enten, H. "How Much do 'October Surprises' Move the Polls? FiveThirtyEight, October 30, 2016.
14
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COVERAGE UNIVERSE
STOCK RATING
CATEGORY
Overweight/Buy
Equal-weight/Hold
Not-Rated/Hold
Underweight/Sell
TOTAL
INVESTMENT BANKING CLIENTS (IBC)
OTHER MATERIAL
INVESTMENT SERVICES
CLIENTS (MISC)
COUNT
% OF
TOTAL
COUNT
% OF
TOTAL IBC
% OF
RATING
CATEGORY
COUNT
% OF
TOTAL
OTHER
MISC
1142
1431
69
665
35%
43%
2%
20%
264
303
7
81
40%
46%
1%
12%
23%
21%
10%
12%
566
713
9
288
36%
45%
1%
18%
3,307
655
1576
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received investment
banking compensation in the last 12 months.
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