INVESTMENT
NOTE
November 1, 2016
US Presidential Election –
How different outcomes could affect the markets
The US election is nearing and very soon, we’ll learn who will be the next president of
the United States of America. In this Investment Note, we’ve asked our portfolio
managers to comment on what their expectations are for a Donald or Hillary win, on
both the short-term and long-term implications for capital markets and policies. We
explored the potential outcomes on markets in the US and globally, and what threats
and opportunities can arise from either scenario.
Asset Class: US and Canadian Equities
Manulife Asset Management
Alan Wicks, Senior Managing Director and Senior Portfolio Manager, US Equities
Speculation about who will be the next US President mounts as we head into the home stretch of the upcoming
Presidential Election on November 8. Manulife Asset Management's senior portfolio manager Alan Wicks explains why
investors might want to keep an eye on the outcome of the Congressional Election, which is also held on the same day.
The latest polls suggest Mrs. Clinton will be elected as the 45th President of the United States1. Where the financial
markets are concerned, a Clinton administration means status quo will be maintained. Given investors’ dislike for
uncertainty, it is fair to say we believe this would be the markets’ preference.
Understandably, there has been much debate about what would happen after the election based on comments that both
presidential candidates had made during their campaigns. Naturally, not all campaign pledges will translate into policy.
Once the excitement about the event has faded into the background, we think investors should take a moment to assess
which issues are most likely to emerge as the top priorities for the new Commander-in-Chief.
Broadly speaking, investors already know where each candidate stands on taxation, infrastructure spending and
healthcare – finance-related topics that dominated the campaign. The key question is: which among these issues are
most likely to become policies that could impact markets?
For instance, Mrs. Clinton proposed to adjust the corporate tax code to make it more difficult for companies to outsource
and move their headquarters overseas2, whereas Mr. Trump would like to reduce the federal corporate tax rate by 20%3.
Both proposals would have significant impact on the economy as well as corporate profitability.
1
USA Today: Poll Tracker, as of October 25, 2016
INVESTMENT NOTE | NOVEMBER 2016 ECON Separately, both candidates made lowering the cost of prescription drugs a main talking point during their respective
campaigns. If this were translated into policy, it would have important implications for the healthcare industry4.
For these reasons, we think it is important for investors to pay attention to the outcome of the congressional elections,
which also takes place on November 8. A gridlock in the US Congress could hamper the ability of the new administration
to push through new policy initiatives.
As long-term, bottom-up fundamental investors, the US Presidential Election is unlikely to affect our view of the markets
by too much. However, a surprise victory by Mr. Trump, which the latest polls suggest is unlikely1, could heighten volatility
in the short-term.
But as with most unexpected market events, calm will eventually prevail once risk has been repriced – as our experience
with the Brexit vote in June has shown. That said, we believe a Trump administration could encourage investors to be
more conservatively positioned than they would have been otherwise in the immediate term, until they have a better
sense of what to expect next.
Within this context, we think it is important to keep an eye on price levels. From a valuation perspective, we believe any
upcoming volatility could create pockets of opportunities. As always, it is about due diligence and ending up on the correct
side of the risk reward argument.
Asset Class: US Equities
Sub Advisor: Manulife Asset Management (US), LLC
Sandy Sanders, Senior Portfolio Manager, US Equities
The US Presidential Election is less than one week away with US citizens voting at the polls on November 8. The election
has dominated headlines for some time with contested primaries early in 2016, party conventions over the summer, and
surprising rhetoric throughout the general election fall campaign. In this note, Sandy Sanders, senior portfolio manager at
Manulife Asset Management, explains how he expects US stocks might react to different outcomes.
Our base case outcome, as reflected in the latest polls5, is for Mrs. Clinton to win the presidential election and for
Republicans to maintain their majority in the House of Representatives. The Senate race is a closer call at this moment,
with Mr. Trump’s recent comments pushing the odds of Democrats taking control higher6. Although the Senate polls are
fluid, we believe the base case outcome of split party control is largely priced into markets today7. As witnessed with the
Brexit vote, surprises can happen however. Let’s take a look at two other possible November 8 outcomes.
Alternative Scenario One:
A clean sweep for the Democrats: Mrs. Clinton in the White House and majorities in both chambers of Congress.
This outcome would likely push pharmaceutical companies’ stocks lower over fears of drug price controls. Despite Mrs.
Clinton’s close relationship with Wall Street, the result could also pressure US bank stocks as the clamor to break up the
“too big to fail” banking sector could grow louder. We think both policy actions would require major legislative commitment
and are unlikely to come to fruition. In our view, any short-term market volatility that follows could present opportunities in
these sectors.
CBS News: Five Questions For Clinton and Trump – the Economy & Taxes, September 26, 2016
DonaldJTrump.com: Fact Sheet - Donald J. Trump's Pro-Growth Economic Policy Will Create 25 Million Jobs, September 15, 2016
4 Forbes: Where Trump and Clinton Stand on Health Care and Medicare, August 12, 2016
5 USA Today: National Polling Averages, as of October 14, 2016
6 ABC News: ABC News Race Ratings Show Tight Race for Control of US Senate, October 7, 2016
7 University of Iowa Electronic Markets: 2016 US Presidential Election Markets, October 14, 2016 2
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INVESTMENT NOTE | NOVEMBER 2016 ECON Alternative Scenario Two:
A victory for Mr. Trump
We would expect short-term volatility and a likely sell-off in the general equity markets, and odds of a US recession would
likely rise due to Mr. Trump’s intended protectionist policies limiting free global trade. Over the longer term, US
corporations could partially offset these negative policies with lower taxes, fewer regulations and the ability to repatriate
foreign earnings.
Additional Note:
Regardless of who wins the White House, we think the US could see fiscal stimulus in the way of infrastructure spending.
Both presidential candidates support increased spending on highways, bridges, airports, etc. as a politically-friendly way
to boost the economy and create jobs.
Although the markets may experience short-term volatility surrounding the election and the outcome, we believe that
company fundamentals matter more in the long run. Volatility may provide opportunity, especially if the election results
differ from current expectations.
Asset Class: US High Yield and Canadian Fixed Income
Manulife Asset Management
Terry Carr, Head of Canadian Fixed Income
As the campaign season for the upcoming US Presidential Election draws to a close, Terry Carr, Manulife Asset
Management’s Head of Canadian Fixed Income, shares his views on how the event could impact the fixed income
markets in the US and Canada.
Our base case scenario, supported by the latest polls8, is for Mrs. Clinton to win the Presidential race on November 8. We
believe having another Democrat in the White House would mean continuity in the broader operating environment,
thereby suggesting that the coming change in leadership would have limited impact on the financial markets.
According to the Committee for a Responsible Federal Budget, a non-partisan organization that advocates for fiscal debt
reduction, Mrs. Clinton’s proposed policy mix would likely maintain US national debt on its current trajectory9. As such,
any impact on the US Treasury market under this scenario would likely be limited.
Similarly, under this scenario, the Federal Reserve would most likely continue on its current path of interest rate
normalization, and raise rates in December should upcoming economic data support such a decision.
By contrast, we think the Fed might keep rates on hold if Mr. Trump is elected. His election is likely to spark volatility,
which could convince the Fed to refrain from raising rates.
From a sectoral perspective, we think a victory by Mrs. Clinton could be negative for high yield issuers in the healthcare
sector. Mrs. Clinton has made clear her intention to tackle “excessive price increases” in drug prices10, and said she will
reform the Affordable Care Act11.
New York Times: Latest Election Polls 2016, October 23, 2016
Wall Street Journal: Clinton vs. Trump – Where They Stand on Economic Policy Issues, as of October 23, 2016 10 Guardian: Pharmaceutical Shares Fall on Clinton Comments on Excessive Drug Prices, August 25, 2016
11 CNBC: Trump Vows to Kill Obamacare, Clinton Wants to ‘Fix’ It, October 9, 2016
8
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INVESTMENT NOTE | NOVEMBER 2016 ECON Separately, Mrs. Clinton has pledged to transform the US into a “clean energy superpower of the 21st century”12. This
could have negative implications for the traditional oil and gas industry. Mr. Trump, on the other hand, is seen as being
relatively friendlier to the industry13. However, we believe their policies have been priced into the market, given where we
are in the election cycle.
Meanwhile, however unlikely based on the latest polls, a victory by Mr. Trump could catch the markets off guard and
heighten volatility – particularly in Canada, where he had talked about the need to renegotiate or terminate the North
American Free Trade Agreement14. This could have a negative impact on the Canadian economy since the US is its
largest trading partner. Under this scenario, we believe the Canadian dollar could weaken against the US dollar.
If this were to transpire, it would affect Canadian manufacturers and exporters, which are largely based in Ontario,
Quebec and British Columbia. This, in turn, would hurt those local economies and potentially increase their provincial
debt loads. By contrast, provinces with a larger exposure to the traditional energy industry (e.g. Alberta and
Saskatchewan) might do better, if only on a relative basis.
Interestingly, a Trump administration could also spark a wider movement towards higher quality fixed income assets as a
response to expected volatility. That could be positive for Canada’s sovereign debt – after all, it belongs to an ever
shrinking group of developed nations that has a top notch credit rating and actually offers positive yield.
Asset Class: Global Equities
Sub Advisor: Mawer Investment Management Ltd.
Our approach has been to bring the discussion back to focusing on having a diversified portfolio of wealth generating
companies, with good management teams, trading at a discount to intrinsic value. This gives us confidence that over the
long-term the portfolio will be resilient no matter who becomes president or what the markets do before and immediately
after the election.
Some of the rhetoric from both candidates has added to the broader theme of anti-globalization which is a concern for
some of our holdings that focus on being the best globally. However, there is still uncertainty if those anti-globalization
themes will play out and if they do occur what impact they will have for various businesses, as it will unlikely be a blanket
reduction in trade.
It is also important to remind clients that while both candidates have made statements regarding their intended action
plans, neither can do much without the approval of Congress and the Senate, which act as a strong check-and-balance.
Consequently, our lack of an edge on knowing how markets will react before and after the election make it even more
important for us to focus on individual businesses in the portfolio and the inventory list so that if there is a dislocation
between the business fundamentals and the market then we are prepared to act; if need be.
New investment ideas are constantly emerging, and we don't expect this to change leading up to or after the election.
Medium.com: Hillary Clinton – Why I Oppose Keystone XL, September 23, 2015
Guardian: Donald Trump would allow Keystone XL pipeline and end Paris climate deal, May 26, 2016
14 Washington Post: The Final Trump-Clinton Debate, Annotated Transcript, October 19, 2016 12
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INVESTMENT NOTE | NOVEMBER 2016 ECON Asset Class: Multi-Asset Strategies
Sub Advisor: Standard Life Investments Limited
Multi-Asset Team
Currently the outcome most closely priced into the market is a Clinton presidency constrained by a Republican majority in
at least the House. Therefore if newsflow differs from this, then our expectation is that there may be more volatility in the
market leading up to the election. However, it is very difficult to predict these short-term movements.
Since neither candidate has been completely transparent and consistent about their economic policy, and because there
are other factors that may swing the policies (the constitutions of the senate/congress, etc), it is challenging to quantify the
risk associated with the upcoming election. Nevertheless, the Standard Life Investments Multi-Asset team has been
working to understand each candidate’s policies and the potential risk and investment opportunities.
The US election is not the only political risk. Additionally, in Europe we also see a number of political events on the
horizon, including the Italian referendum, French election, and German election, all of which might potentially pose a
meaningful impact on financial markets. Our aim is to construct a resilient portfolio that can cope with the potential shocks
caused by these events while maintaining a positive return bias over the long-term.
We are mindful to keep a balanced set of risks in the portfolio running up to the election, which we do currently have in
place. We carry out forward looking scenario analysis to test the effects on our strategy and currently we are comfortable
with our positioning and have not felt the need to change our positioning. This allows us to investigate and understand
likely behavior of the portfolio in periods with the unique drivers and feedback effects that these types of political events
may have. We believe this of critical importance to potentially generating consistent long-term returns. Additionally, these
events may drive changes in fundamentals. The flexibility of our multi-asset approach is particularly supportive in periods
when the investment environment is changing.
Furthermore, we do not position the portfolio to benefit from binary events such as the US election.
There are positions that may potentially benefit in certain outcomes. For example, a Clinton presidency that is coupled
with a Democratic congress may result in increased government spending which should push interest rates higher and be
supportive of the US dollar. As a result, our relative value position Australia vs US interest rates and Long US dollar vs
euro / Korean won and Singapore dollar should all benefit.
As for potential opportunities which may arise from this election, history shows that markets are often slow to recognize
and price in the change offering us opportunities to generate returns. In addition, these types of events can change
fundamentals which could therefore lead to more opportunities.
We believe that what is currently priced into markets is a Clinton presidency, then anything different to that may lead to
more volatility in the short-term. We acknowledge that the market moves immediately after the election could be quite
different to the longer-term reactions and that the investment teams would have to monitor post-election policy action very
closely given the likely gap between campaign rhetoric and the realities of governing. Since neither candidate has been
completely transparent or consistent about their economic policy, it is very difficult to interpret the long-term impacts.
Asset Class: Global Infrastructure
Sub Advisor: Brookfield Investment Management Inc.
In the lead up to the 2016 US presidential election, we have not seen the need to significantly adjust our portfolio holdings
leading into the November 8th election. Given the current polls and generally low levels of volatility in the markets, it would
appear the market is pricing in a victory for Hillary Clinton. That said, an unexpected comeback and victory for Donald
Trump could therefore potentially result in some near-term market volatility. In terms of our specific portfolio holdings, we
have not seen a need to significantly adjust our holdings ahead of Election Day.
INVESTMENT NOTE | NOVEMBER 2016 ECON In terms of new investment opportunities, we appreciate that the presidential candidates from both major parties have
embraced the notion of increased infrastructure investment in the United States. But a meaningful upswing in government
infrastructure investment is difficult to envision, in our opinion.
Addressing aging US infrastructure is absolutely essential to attaining our potential in terms of economic growth, and the
social and political implications of such an investment program could be enormous. However, it is difficult, for a variety of
reasons, for the various levels of government to make substantial progress. Over the years this has resulted in the
“infrastructure gap,” as government infrastructure spending has not kept up with the country’s basic needs. The good
news for investors is that capital remains scarce as all levels of government are reluctant to ramp-up infrastructure
spending. The private sector is a natural solution and reasonable investment returns are possible as governments work to
incentivize the private sector to invest.
It is important to note that even if we were to see a meaningful increase in US infrastructure spending, the investment
universe in which we invest would not be the initial beneficiary of such fiscal stimulus. We invest in the owners and
operators of long-term infrastructure assets, rather than engineering, development or construction companies that would
see an immediate impact as projects are designed and built. Ultimately, however, as these assets are brought online, we
could see increased opportunities for companies to operate and manage these assets.
INVESTMENT NOTE | NOVEMBER 2016 ECON Investing involves risk, and there is always the potential of losing money when you invest in securities.
A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is
likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.
Global events have resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign.
Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.
The material and opinions expressed are those of Manulife Asset Management and the sub-advisor(s) of Manulife Investments as of the date of this
publication, and are subject to change based on market and other conditions warrant. The information and/or analysis contained in this material have
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