October 2016

US election: odds on Trump are rising

  • The opinion polls are narrowing and post the Brexit shock we would not rule out a Trump victory in the presidential election. Both candidates favour fiscal expansion, but Trump’s are on a larger scale. Unfortunately, when combined with his protectionist trade policies they will only bring stagflation to a late-cycle US.
  • The US equity market remains buoyant, a sign that Hillary Clinton, as the candidate of the incumbent party, will win. However, there is still time for this to reverse.
  • The rise in populism is underpinned by anti-globalisation sentiment such that the greatest threat to our 2.5% global growth forecast is not economic, but political in the form of a surge in populism.

Europe’s political roadmap

  • Investors in Europe face another tough year navigating through lots of political risk. Brexit seems to have galvanised protest parties across the union, which is prompting investors to carefully consider the discount they apply to European risk assets.
  • Many of the upcoming events either carry a low risk of happening, or a low impact. The two most notable are the Italian referendum and Dutch election, where the former could see the Prime Minister lose his job, while the latter would propel a far right nationalist party into power. Elections in France and Germany in 2017 should be more straightforward, but Brexit has taught us not to underestimate protest movements.

Bank flows and the state of emerging markets

  • Recent data on international banking flows offers a chance to take stock of how easy monetary policy globally may have built vulnerabilities in emerging market economies. China is a problem, but there are other causes for concern, with Turkey, Colombia and Thailand looking riskiest in their respective regions.

Views at a glance

  • A short summary of our main macro views and where we see the risks to the world economy

The full document is available below.