The US elections are not going to end in the “transformational” result that is currently being considered, a July 24 Morgan Stanley research report says. A population turning its back on “economic liberalism” and the benefits for globalization will not take place in today’s world for some very practical reasons.

 

Don’t worry, Clinton is expected to win, Morgan Stanley says

“You’d be forgiven for thinking that the world is about to change,” Michael Zezas, Morgan Stanley’s Chief Municipal Strategist, observed. Looking at Brexit, the coup attempt in Turkey, the previous US debt-ceiling crisis are but a few examples of political crisis risk that could eventually wake up investors.

While elections have consequences, not all consequences are transformational, Zezas writes. As a result he is not emphasizing US political risk as a positive or negative catalyst in his outlook.

This neutral outlook is due to several points.

Considering poll results, betting markets and election models, Zezas most significantly assumes Hillary Clinton is likely to win.

If Clinton were to win the potential for a “transformational” US president would be greatly diminished. This is not only due to her generally pro-business and trade stances on economic issues, but also the Congressional makeup.

Zezas first considers how the government was designed to be divided and this is the likely outcome. Republicans have control of Congress and in the House this is unlikely to change with a 29-seat majority and only 18 seats likely in play. There is a chance Democrats could take the Senate with a slim majority.

“Taken together, we think the odds favor policy ‘incrementalism’ – the idea that only small, gradual progress toward the President’s goals will be made – in the near term, rather than the ‘transformational’ policies they’re espousing,” he wrote. In other words, Clinton will likely not implement many grand plans if elected. Even if she does take a populist tone, which would be a surprise, Congress will moderate her behavior. Significantly, Congress and potentially the US Supreme Court might also mitigate many of Trump’s transformational plans.

The lack of potential for a transitional government will result in investment winners and losers. On a macro level, the dream of fiscal and monetary stimulus integrating with one another appears put in check. “This means that campaign promises on both sides pushing the US toward major tax reform, trade protectionism, and others appear more bark than bite,” Zezas wrote. “Fiscal stimulus, for example, would appear unlikely.”

MS election chart 7 25 2

Morgan Stanley cites Nate Silver one day before he says Trump would win if election held today

This analysis is primarily based on Trump not winning.

When data journalism site FiveThirtyEight published its initial 2016 election forecast model, giving Trump a 20-25% chance of victory, its editor in chief, Nate Silver, noted that these odds were roughly equivalent to a visiting baseball team coming back from one run down in the top of the eighth inning.

In Sunday’s analysis Zezas notes that Trump is edging closer. But one day after Nate Silver made comments Monday in his “now cast” that noted if the election were held today, Trump would win.

If the improbable occurs and Trump does win, Zezas suggests hedges using transformation as the key driver. This could result in exposure based on fiscal stimulus leading investments, including short 10- year US Treasuries as well as long infrastructure stocks. It Trump wins, Zezas also recommends trade protectionism plays such as buying the US dollar and Mexican peso. Tax reform transformation should result in overweight taxable municipal bonds.