- Barclays and UBS equity analysts give insight into how European investors should be thinking about the US election in new research notes.
- The consensus across both banks is that a Democratic sweep would be most beneficial for investors with policies that would likely reduce trade uncertainty and create stronger ties with the US.
- "We expect the outcome of the US election to affect the European economy via two key channels: trade and foreign policy," said UBS economist, Dean Turner, in the note.
- Business Insider lists the top pieces of advice for European investors from the banks.
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With less than a week till the US election, top investment banks are providing clients with their analysis on what the various election outcomes will mean for investors.
Across the pond, European investors will also be keeping an eye on the results. Both Barclays and UBS have broken down what the US election outcome could mean for European investors providing some key pieces of advice and insight.
The most common theme across both Barclays' October 21 note and UBS's October 26 note is that a Democratic sweep would be most beneficial to Europe with policies that would likely reduce trade uncertainty and create stronger ties with the US.
"We expect the outcome of the US election to affect the European economy via two key channels: trade and foreign policy," said UBS economist, Dean Turner, in the note.
However, Barclays' equity analyst, Emmanuel Cau highlights that in the long-term elections have had little lasting impact on markets. He believes a convincing win by either candidate would be a "market-positive" in the short-run, noting that value stocks have typically led post-election rallies.
A contested election, which still remains a possibility, would present the most market volatility out of the election outcomes, Cau said.
"The contested election of 2000 saw European and US equities fall 10% the following month, bond yields move lower and defensives outperform," Cau said.
Whereas a divided government with President Donald Trump returning to the White House and a divided Capitol Hill could mean a return to the status quo and modest policy shifts, Turner said.
"A fiscal package to support the economy would still emerge, but it is likely to be smaller than under a Blue Wave," Turner said. "Renewed trade tensions with China could emerge and Europe is likely to remain in the crosshairs for the trade hawks."
Here's the 6 pieces of advice for European investors from Barclays and UBS:
1. A Biden win is likely to be more beneficial to Europe due to 3 key policies
Barclays outlines 3 key Biden policies that would have a positive impact on European investors.
1. Increase in corporate tax rate, would be more of a negative for US than European earnings, Cau said. But the European companies that benefited from the US tax cuts may see an impact on their EPS, he added.
2. The $2 trillion stimulus package focused on infrastructure from Democrats could "boost secular themes already in play in Europe, like ESG, digitalization and de-carbonization."
3. Closer US-Europe economic cooperation could bring "fewer tariffs, freer trade and support emerging markets and China-exposed stocks."
UBS analysts echo many of these sentiments with an emphasis on Europe's advantage with ESG assets.
"Europe, which is ahead of the US in terms of a transition toward ESG assets, should thus indirectly benefit from the inflows into the broader theme," Turner said.
In the medium term, a Biden administration would benefit European companies leading on green initiatives, Turner said.
The big sector winners in Europe would be autos and utilities, Turner said. While energy is likely to face tougher regulations, he said.
2. A Biden win could create a rotation from US stocks into rest of the world stocks and value stocks
Cau believes a Democratic sweep could boost the reflation trade, which might result in a rotation into rest of the world equities and value stocks, if it leads to a weaker US dollar, rising yields and a steepening yield curve.
Read More: BANK OF AMERICA: Buy these 22 European value stocks to cash in on a possible 10% rally in early 2021 — but avoid these 6 'value traps'
3. A Trump win could continue to drive the outperformance of US equities
If Trump secures a second term, Cau believes US equity outperformance should continue with regulatory relaxation helping sectors such as technology, healthcare and energy.
The Trump presidency has benefited the US equity market compared to the rest of the world. The S&P 500 has rallied by 48% since Trump took office, compared to a 3% gain in Chinese blue-chips and a 5% loss in major European shares.
Defensives and value sectors, such as financials and energy, have lagged the most, Cau said. He also notes that despite the US-China trade war, Chinese equities are performing in line with S&P 500 due to large technology exposure compared to Europe and LATAM where stocks are underperforming.
"We note that in the immediate aftermath of the November 2016 election, US-exposed names in Europe, as well as Materials, Financials and Healthcare outperformed," Cau said. "On the flipside, Energy, Tech, Discretionary, Staples and Utilities all underperformed."
4. A stronger euro either way
In coming weeks, the FX market is likely to be sensitive to changes in the lead up to and the aftermath of the results, Tuner said. But with both outcomes, he believes in the long term investors will see a weaker dollar and a stronger euro
"A stronger euro would likely weigh on Eurozone growth, but not to a meaningful extent; the positive boost to the global economy coming from a US fiscal stimulus should outweigh this," Turner said. "Furthermore, while a stronger euro could have a deflationary impact on import prices, this should prove transitory."
5. A post-election dip could create a buying opportunity for rest of the world equities
Barclays' analysts found that value stocks tend to lead the market once the uncertainty of the election results is out of the way. Ahead of the election, non-US equities typically outperform and then lag.
"We thus believe that if history repeats itself, any potential post-election dip this time around should be used as a buying opportunity," Cau said.
6. Sectors exposed to China could perform well under a Biden win
In 2018, on the days when negative US-China tariff news flow happened, the following sectors in Europe underperformed: Semis, Tech H/W, Financials, Autos, Materials and Capital Goods, Tuner said. All these sectors had "significant revenue exposure" to China, he said. A Biden presidency with less aggressive trade and tariff policies could benefit these sectors.
"Our basket of China-exposed names (BCEUCHIN) has been outperforming the broader market since late summer as the possibility of a Biden presidency increased," Cau said. "We believe that, if Biden wins the presidency and follows a less aggressive policy than Trump on trade, tariffs and China in general, then sectors exposed to China like Semis, Tech H/W, Cap Goods, Materials and Autos may potentially benefit."
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