The results are now in for the widely anticipated US midterm elections.
Joshua Mahony, market analyst at IG, online trading platform: “An overnight victory for the Democratic party in the House of Representatives has helped improve market sentiment, as European stocks and the Yuan gain ground amid hopes of improved relations with the US.
“The US midterm elections went largely according to plan, with the Democrats taking control of the House of Representatives to strip Donald Trump of the complete control his party had in Congress. A weakened dollar highlights the feeling that this may not be good for near term growth prospects, with a greater degree of scrutiny and opposition expected for any policies put forward by the administration over the next two-years.
“Trump’s plan to enact a 10% tax cut for the middle class could be hit, with any another massive fiscal giveaway as being good for the near-term, yet hugely worrying for the long-term debt sustainability.”
What was the result?
The Democrats have managed to claw back control of the lower house (House of Representatives) by gaining more than 26 seats, so they have in total 219 seats, with President Donald Trump’s Republicans securing 193 seats. It is a different story for the Senate, in which the Republicans retained control – 51 seats to the Democrats 45 seats.
The loss of control of the House will make it harder for President Trump to push his policies forward.
Nigel Green, founder and chief executive of deVere Group, says: “The Democrats gaining control of the House of Representatives is likely to drive a rally in US financial markets into the year-end.
“This US bounce can also be expected to positively impact global financial markets, given the high correlation between Wall Street and risk assets elsewhere.
“However, it can be reasonably assumed that this rally will be relatively short-lived as it could then be offset by legislative gridlock in Washington. This will halt deregulation legislation, which in turn will hurt sectors such as banking, energy, industrials, and smaller companies that stood to gain most from looser controls. Pharmaceuticals may suffer as the Democrats seek to bring down drug prices.”
How to position your portfolio?
deVere’s CEO Green believes the best way for investors to mitigate risk is portfolio diversification: “Indeed, investors’ portfolios should be diversified enough to see any market outcomes as an opportunity. A well-diversified portfolio should always include several industrial sectors and asset classes, as well as geographical regions.”
Green adds: “This might look like a defeat for Donald Trump, but the reality is that he might not mind losing the House of Representatives too much. In this situation he could feasibly then attribute blame towards the Democrats should the economy falter and they refuse to pass more tax cuts to boost demand.”
Nathan Sweeney, senior investment manager at Architas has taken a tactical overweight position in the US after the recent global stock market turmoil in October, he said in an interview in the Sunday Times, that he has taken the opportunity to put more money in the US tech giants: “You just have to work out the reason for the sell off and whether there’s anything to actually be concerned about. People will continue to use search engines and social media regardless of the economy, so there’s no reason not to invest in these firms.”
US economic outlook
Paras Anand, head of asset management, Asia Pacific, Fidelity International, says: “For once, the outcome of the midterm elections has gone the way the pollsters and political analysts expected, with the Democrats taking the House of Representatives and the Republicans retaining their marginal hold on the Senate. In what will be seen by some as an inevitable reaction against an unconventional White House, the question is whether there is anything for investors to consider in this result.
“Perhaps not in the short term. However, as we go through 2019 we might look back and see this result as a further impetus to domestic growth.
“During the 2016 Clinton election campaign, infrastructure spend was high on the Democrat’s policy agenda (as it was for Trump). It is possible that with a bi-partisan focus on the pent-up need for domestic infrastructure investment, the Democrat view on the budget deficit may change from opposition (to tax cuts) to accommodation (spending on roads, hospitals, and airports).
“Any development in this direction would further spur the overall economy, continue to push wages in an already tight labour market, and potentially challenge the current expectations around the Federal Reserve’s activity for next year. Most political events have an underwhelming economic impact – could the US midterms prove the exception?”
Sabuhi Gard is an investment writer for Incisive Works
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