The $10 trillion wager: Obama versus Romney, stocks/bonds edition
Investors reckon Obama and Romney offer starkly opposing prospects for US bond and equity markets, according to a Barclays Capital survey.
Here’s a speculative survey of presumptive investor positioning in the event of an Obama or Romney presidential victory, courtesy of Barclays Capital.
The survey draws some consensus conclusions, namely that a Romney victory will be poor for bond markets, at least initially, as investors price in the prospect of a QE-unfriendly Bernanke replacement, though a negative growth shock amid spending cuts would presumably trigger a flight-to-safety bid.
We will reserve judgement for now, except to say the survey probably provides a useful perspective on just how strongly investors believe in the concept of expansionary fiscal contraction, despite damning IMF evidence to the contrary.
The survey appears to have teeth, running between October 24 to 26, and drawing 354 respondents, responsible for a whopping $10 trillion in assets under management, including institutional asset managers, hedge funds, banks, corporates and official institutions, namely based in North America and Europe. It states:
|"The US elections have the potential to have a significant impact on US equities and rates markets, according to a recent survey by Barclays Research. Investors seem to believe in a more promising growth outlook under a Romney win, in spite of their concerns about a likely tighter monetary policy stance. They favour long equities and short bond portfolios as the best way to express a Romney win (Figure 11), over any other positions in FX or commodities. As many as 16% even expect the equity rally to be deep and sustained in that case.
"Under an Obama win, investors favour bonds and are divided about the direction of equities, but would choose bonds and equities over FX and commodities to express this scenario (Figure 11). The equity sell-off is expected to be small and short-lived if it happens. Obama’s victory would likely be perceived as preserving the status quo (asset market moves are expected to be muted across the board), while a Romney win is more likely to suggest a change of direction to clients by way of a better growth outlook. Implications for growth are central to global markets, according to clients."
Investors' chief concern under an Obama win is legislative gridlock, while in a Romney administration the risks are more diverse:
|"A congressional deadlock and tax/regulatory impediments where the most voted concerns under an Obama victory (50% and 43%, respectively). When responses were weighted by client size (according to assets under management), the tax/regulatory concerns become the predominant risk factor under an Obama administration (61% of weighted votes), leaving congressional deadlock second (24% of weighted votes) (Figure 2). North American investors seem substantially more concerned about the potential pitfalls of business-unfriendly policies under an Obama administration relative to European investors, whose main concern under an Obama win is congressional gridlock.
"Perceived policy risks are more dispersed under Romney (Figure 1). A tighter Fed policy tops the list of worries (32%) but is closely followed by fiscal tightening (23%) and protectionism (15%). Investors also worry about congressional gridlock under Romney. At 26%, it scores second in the list of worries under Romney – mentioned less often than under Obama (50%), but still substantial. Perceptions of key risks under Romney are similar across clients’."
Just to reiterate, investors appear to echo Romney's view that equity markets will greet his victory:
|"The majority of clients expect equities to see a substantial or small increase under a Romney administration, and to display no major move or a small selloff under an Obama win. Interestingly, investors whose main concern about Obama is investment-unfriendly policies are much more likely (60% of such investors) to believe that an Obama victory will result in a small or substantial equity market selloff.
Moves in either direction are mostly expected to be short lived, although 30% expect the moves to be sustained. Among investor types, corporates are more inclined to believe in a sustained equity selloff under Obama and a sustained market rally under Romney. More than 50% of respondents expect a transitory move in equities after the initial rally under Romney.
In line with equities, investors expect bond markets to sell off under a Romney victory and rally under an Obama victory. Perhaps unsurprisingly, the Romney results are somewhat linked to concerns about a change in Fed policy. Over half of investors who list Fed policy as their main concern about Romney expect a rise in 10y yield of 20bp or more. But the expectation of a rise in rates could be more general than this, and may also be linked to expectations of a constructive outlook for growth, reflected in clients’ equity views under a Romney victory. Half of the investors
who see a substantial."
And for some reason, investors reckon they can make granular predictions on currency movements:
|"US elections are also expected to have implications for FX. Most expect carry (INR, RUB, BRL and AUD) and long EUR positions to outperform if Obama wins, while short EUR and JPY are the preferred positions under a Romney victory. In particular, long USDJPY is the preferred strategy among FX clients under a Romney win, in line with our recent recommendations. This is also the case among hedge funds and corporate clients. Interestingly, Latin American accounts see a higher chance of a small carry sell-off under Romney (linked to their worries about a tighter Fed and fiscal austerity, relative to clients in other regions)."|