Risk Appetite Is Unlikely to Last Regardless of the Election Outcome

Risk Appetite Is Unlikely to Last Regardless of the Election Outcome

9 November 2016, 09:08
Mohammad Soubra

Risk Appetite Is Unlikely to Last Regardless of the Election Outcome


Talking Points:

  • Given market reactions to polls, there is a 'status quo' and 'massive change' election outcome
  • A risk-on view of status quo does not alter the underlying market themes of the past months
  • In turn, the 'massive change' view stokes uncertainty and may hasten risk aversion

 The US Presidential Election carries a lot of weight as a catalyst for investor sentiment. However, its collective influence over global risk appetite is likely limited in duration and almost certainly skewed. While there are strong beliefs over which candidate is better for the economy, the international risk view likely boils down to two particular outcomes: a 'status quo' and 'massive change'. While policies for the economy, taxes, trade and much more will carry significant nuance and evolution to the current bearing; this event will influence the underlying currents of sentiment but not likely alter the collective flow.

Given a platform of remarkable change to existing policies - especially trade - a win by Republican nominee Donald Trump would raise doubt about what the future holds. Whether the ultimate course is positive or negative over time, the uncertainty would be treated as an unknown quantity which translates to implied volatility and de-risking. In a market already steeped in skepticism over the pace of global growth and state of global trade, this could hasten repatriation and withdrawal from over-extended risk positions that don't offer the yield to warrant the capital exposure.

However, even in the 'status quo' outcome - where Democratic nominee Hillary Clinton secured the win - there is limited risk appetite that would likely arise from the global financial system. While the expected course of the US political system and economy would be seen as more steadfast, that does not alter the underlying structure of sentiment that has developed over the past months and years. Short-term implied volatility would sink and likely encourage a quick rebound in exposure; but issues like low returns, moderate global growth, the fading effectiveness of monetary policy and other measures will remain.

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