Emma Wall: Hello and welcome to the Morningstar Series "Market Reaction". I'm Emma Wall and I'm joined today by Economist for Rathbones, Ed Smith to talk about the U.S. election.
Hi, Ed.
Ed Smith: Hello Emma.
Wall: So, we are here today to talk about the U.S. election. Probably the U.S. election is almost by the hour, the news changes and part of that is due to the polls. It seems that the polls keep changing their minds about who's going to win. So how much can we trust those statistics.
Smith: Well, I think the polls are only as good as the statisticians who adjust the data, adjust the samples for any biases and prejudices. So historically whether you are a man or a woman, whether your race, your education, your habitual voting. They are all pretty, good indicators of which way you are going to vote.
Well, that's no longer the case in U.S., in the U.K., in Europe and that’s why the polls have been letting us down. The samples aren’t really unbiased. So, and I think that’s very much the case in the U.S. it's not about Democrat versus Republican, so much as establishment versus anti-establishment.
So, that makes reading the polls rather difficult. We have been looking at bookies. But again, they called the U.K. referendum wrong. The quantity of money suggested that we would remain, if you remember, but actually something that nobody looked at the time, that the number of small bets actually suggested that we would leave. Unfortunately, U.S. is not as clear cut this time on that data either. So, lot of uncertainty out there. It is possible Trump could win.
Wall: From an economist point of view this is quite an interesting election. People are drawing comparisons with as you mentioned Brexit and indeed extrapolating that to what that would mean for perhaps the French election with Marine Le Pen, perhaps being an anti-establishment vote in that sphere. However, I think for U.K. investor it is important to draw back slightly and look at what that may mean literally for markets, for portfolios. For those people who invest in U.S. equities. So, from that point of view, leaving the top line aside, what genuinely does it mean for U.K. investors.
Smith: Well, I think if you are a U.K. investor, actually even if you don’t invest directly in the U.S. you still want to pay attention to what's going on. Because 20% of FTSE 350 revenues are earned in the U.S., from U.S. sales. Similarly, if you are global investor like we are at Rathbones. You want to look at what's been driving GDP growth around the world. The U.S. accounts for about a fifth of global GDP and about eighth of global GDP growth over the last five years.
Now we think that the results of the U.S. election could meaningful impact U.S. growth. Trump, we think of, what is quite bad news for U.S. growth. Big uncertainty shop, his fiscal plan is almost certainly going to dampen growth because it favors the rich who are likely to save income at the expense of spending elsewhere. Whereas Clinton, better the devil you know perhaps, less uncertainty, which is better for growth. Although she does have some policies that markets might not like that too.
Wall: I think investing one-o-one leads us to believe that the economy and the stock market are entirely different entities. And what goes on in the economy may not necessarily impact the stock market. However, we have seen increase in correlation over the last couple of years, partly due to monetary policy. So that being said should investors be eyes open to what's going on in this particular sphere?
Smith: Well, I think one of this things we've seen develop over the last few years is quite a close correlation between economic uncertainty and what we call the equity risk premium in equity markets, how much compensation investors demand for the risk of taking on equity related cash flows. So, we've seen as economic uncertainty rises and we have some tools to measure that, equity risk premiums go up, all other things being equal. That means lower stock market valuations.
So, if the results of the U.S. election causes a lot of uncertainty at very elevated levels, that's likely to mean lower stock market correlations. But as you say, over the – that aside, over the short-term there's plenty of other things that affect market other than economic growth, not a brilliant correlation there. But over the long run and we like to think of ourselves as long-term investors, although we make tactical decisions, our starting point is a 10-year view.
Over the long-run, what drives investment returns taking out all the cyclical noise is the economy and so we've got to look at what does Trump and Clinton mean for the drivers of growth, what does it mean for working population, what does it mean for investment, what does it mean for productivity.
Wall: And what does it mean for investment? What does it mean for the productivity? I mean now most people are now coming around the concept of Clinton for President, is that a positive thing?
Smith: Yeah. I mean we think it's certainly most positive than Trump and really what's going to drive growth over the next quarter or century is productivity as working age population slow as investment slows down for various reasons.
Trump's sort of big ticket item is protectionism, that's the death note for productivity in our opinion. Protectionism by definition shuts off competition – shuts down foreign competition. If you don't have competition, you've got no incentive to make sort of productivity enhanced investments and reforms.
One policy that does – that is very good for productivity, public infrastructure spending, that's one of Clinton's big ticket items. What is about $275 billion earmarked over a five-year period including the establishment of an infrastructure bank, that could be good news for productivity.
Wall: Thank you very much.
Smith: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
