Widespread expectations of a blue sweep did not come to fruition on 3 November 2020 as the phenomenon of the “silent Trump voter” came into play yet again. With President Trump taking key swing state Florida and rival Joe Biden winning Arizona on election day, it was a very close call between both candidates until Wisconsin and Michigan were declared for Biden.

As widely anticipated, Trump’s campaign has threatened legal action due to claims of widespread voter fraud, especially in the aftermath of the Michigan and Wisconsin results. This could escalate further if he wishes to attempt recounts in states that Biden has won with narrow margins, and there is the tail-risk that this could inject renewed uncertainty into markets.

For now, investors have mostly disregarded the tail-risk of a prolonged and chaotic contest by Trump, mostly due to the relief from getting over the election hump, and because it is unclear if Trump has a concrete legal basis for contesting the results.

Our baseline expectation is that Biden will take over the administration as president in January 2021 with a divided Congress – that is, with the Senate controlled by a Republican Party majority, and the House of Representatives controlled by the Democratic Party. Given the close race between Biden and Trump for the presidency, a split Congress is unsurprising.

We expect the Republican Senate to take an obstructionist role, similar to what we saw in the last years of Obama’s presidency, and believe that the prospects of major legislation are significantly lowered.

On the bright side, Trump’s tax cuts are unlikely to be reversed under this scenario; but on the other hand, the odds of sweeping stimulus spending on infrastructure, environment, and healthcare that Biden has proposed are far diminished.

We believe that Biden’s first order of business will be to manage the Covid-19 pandemic, and, in the first few months of his presidency, focus on pushing through a new Covid-19 relief package to provide much needed unemployment and business support.

Despite a Republican Senate in place, we believe that there is sufficient common ground between both parties to enact a relief aid package that is around USD500 billion to USD1 trillion in 1Q 2021, which will be critical in supporting the nascent post-pandemic recovery.

Later in his term, Biden is likely to focus his attention on infrastructure spending, which has some bipartisan support, but again the Republican Senate is likely to only greenlight a far smaller package (by our estimates around USD500 billion) versus what Biden has proposed in his campaign agenda.

This is second-best scenario for investors; market outlook remains positive

Overall, despite a Biden win with a divided Congress being only second-best for markets (vs. a blue sweep scenario of a Biden win and Democrats winning full control of Congress), we still see many positives.

First, the reduced uncertainty from putting the election behind us will help investor sentiment, and will give the Federal Reserve the necessary clarity for crafting policy ahead, including providing further policy support if needed.

The expectation that Biden’s team will be better positioned to manage the Covid-19 pandemic than Trump’s administration will also boost investor sentiment.

Under a Biden presidency, we expect an overall environment characterized by the post-pandemic economic recovery, moderately higher inflation, and a weaker US dollar. This will be broadly supportive of equities, credit, commodities, and emerging markets.

Second Covid-19 waves pose near term risks

The resurgence of Covid-19 infections in the US and Europe remains a potential near term headwind for risk assets, as renewed restrictions to control the virus spread are slowing the momentum of economic recovery. We expect sequential contractions in both the US and Eurozone economies in Q4 2020.

Over the medium to long term, however, we believe that the post-pandemic recovery remains intact, supported by the accommodative stance of major central banks. Macro trends such as sustained ultra-low rates and waning US dollar strength remain supportive of risk assets.

US Federal Reserve continues to signal support

At its latest meeting that ended on 5 November, the US Federal Reserve kept its main policy settings unchanged as expected, with interest rates held near zero and bond purchases maintained at a USD120 billion monthly pace. Fed chair Jerome Powell said policymakers discussed ways to adjust bond purchases “to deliver more accommodation if it turns out to be appropriate” – again signaling its readiness to provide more support for the economic recovery if needed.

Our view remains that the Fed funds rate could stay near zero until as late as 2025. The Fed’s most recent forecasts show core personal consumption expenditures inflation – the Fed’s preferred measure of inflation – returning to 2% only in 2023. We expect to see 10-year US Treasury yields rising only modestly over the next year.

For investors, we emphasize that exercising discipline in diversification and managing volatility remains key. We also continue to advocate maintaining core portfolio exposure to beneficiaries of long-term secular trends, such as the 5G revolution, the rise of the internet-of-things and cloud-based computing, and lower-for-longer interest rates.

As the dust from the US elections settles, we expect an overall environment characterised by a gradual economic recovery, mildly higher inflation, persistently low policy rates and a weaker US dollar. This will be broadly supportive of equities, credit, commodities, and emerging markets – in particular, the Chinese currency and risk assets in Asia – and result in a moderate steepening of the yield curve.