As the November 5th date for the US presidential elections approaches, global financial markets are grappling with uncertainties spurred by the competitive race between Democratic Vice President Kamala Harris and former President Donald Trump. Their differing policies could result in pivotal shifts not just within the US economy but also in international trade relations that impact various sectors worldwide, from Europe to emerging markets.
Europe in the Balance
European equity markets find themselves precariously poised, with a Trump victory potentially jeopardizing export-heavy industries, particularly in Germany. Major players like BMW and luxurious brands such as LVMH could face renewed trade tensions, which Barclays predicts may lead to “high single-digit” percentage drops in European earnings. This is primarily due to Trump’s inclination toward implementing blanket tariffs ranging from 10-20 percent on most imports, aimed at reviving US manufacturing.
In contrast, should Kamala Harris prevail, the outlook seems more favorable for European equities. A Harris administration is expected to prioritize investments in renewable energy, which could energize utilities holding substantial projects in the US, such as Orsted and Iberdrola. However, her proposed increase of corporate taxes from 21 percent to 28 percent could squeeze margins for both American firms and European businesses earning in dollars, contrastingly alleviating fiscal strain faced under a Trump administration’s proposed tax cuts.
This election could also have ramifications for ongoing conflicts like the war in Ukraine. Trump has voiced skepticism about the merits of US support for Ukraine against Russian aggression, while Democrats generally advocate for stronger backing. Since the onset of the Ukraine conflict, aerospace and defense stocks have surged by over 80%, reflecting investors’ confidence in sectoral stability during geopolitical upheaval.
Currency Swings
Trade tariffs are crucial for currency markets as well. The euro, which recently traded below its 14-month highs, could suffer in the event of a Trump win, with estimates suggesting a devaluation from approximately $1.09 to around $1.05. Conversely, a victory for Harris might see the euro strengthen past $1.15.
The overall sentiment in currency markets is equally influenced by geopolitical instability. Analysts have pointed to rising oil prices as a potential Achilles’ heel for the eurozone, often adversely affected by disruptions in the Middle East. Countries whose economies are tied to trade with China, like Australia and New Zealand, are also likely to witness turmoil should tariffs rise under Trump, given that a substantial portion of their exports is directed towards China.
China Roulette
The stakes are particularly high regarding trade relations with China, especially as stimulus measures by the Chinese government aim to drive growth amid a tumultuous global landscape. Investors seem to expect a Harris administration to adopt a relatively measured approach to tariffs, while a Trump victory could usher in a more aggressive stance and increased scrutiny of Chinese firms.
If Trump were to win, industry experts forecast a bleak outlook for Chinese companies with diminished access to technological advancements. Risk consultancy Eurasia Group warns that this could also push EU nations to reconsider their economic ties with China. Goldman Sachs projects that such tariffs might result in a 13% decline in Chinese equity markets, indicating significant potential fallout for global investors.
In response to strained exports spurred by tariffs, China’s government may feel pressure to amplify its economic stimulus, thus prolonging interventionist strategies aimed at stabilizing its economy.
Emerging Markets on Alert
Emerging market equities, which have lagged behind their developed counterparts for years, may find some silver linings depending on the election outcome. With the Federal Reserve lowering interest rates, and a decrease in food and fuel prices, emerging markets could unlock new growth opportunities.
A Harris victory would likely signal continuity in Bloomberg growth strategy, providing a supportive environment for emerging market assets. However, a Trump administration might abruptly change this landscape, introducing tariffs that could hinder progress. In particular, Mexico’s economy stands to lose the most given its robust ties to the US. Financial institutions like JPMorgan have advised investors to remain cautious until the electoral dust settles, while UBS warns that potential tariffs could slash EM equity performance by as much as 11% come 2025.
Overall, as the US election approaches, the world watches intently, knowing that the outcomes will profoundly impact economic trajectories across markets globally. With implications spanning currencies, trade relationships, and emerging markets, the stakes are undeniably high.
