US elections 2020: J.P. Morgan Asset Management says that since early September, all eyes have been on the US elections. Its twists and turns have not only been affecting domestic markets, but also international markets, especially via the US dollar. Now, whether President Donald Trump wins, or his challenger Joe Biden does will be known soon enough. Before that, take a look at likely impact on markets.

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Its impact has come from two main sources:

1) The uncertainty around the timing of the election result
2) The outcome of the election itself and its potential impact on international policy

Ultimately, global currencies have been reacting to whether uncertainty is being dialed up or dialed down. On the first point, investors have become concerned about a delayed election result due to the time needed to count mail in votes and the potential for a contested election. This possibility of a prolonged period of uncertainty has not been good for risk appetite, which tends to result in a strengthening of the U.S. dollar, especially versus riskier currencies like emerging market (EM) ones.

Indeed, during the period of peak concern around a contested election (from September 18 to September 29, the U.S. dollar strengthened by 3% versus EM currencies. It also strengthened a bit against developed market currencies by 1%. Since late September, however, Joe Biden’s lead has widened in the polls and his implied probability of victory has increased from 58% in late September to 68% on October 9. This decreased the odds of a close election outcome and a contested election, which gave a boost to risk appetite once again, weakening the U.S. dollar by 1% against EM currencies.

On the second point, there has also been a focus on the outcome of the Presidential election itself. A Biden victory is seen as representing a return to rules based international policy, with a more predictable approach towards trade agreements and the China relationship. This reduction in uncertainty would be beneficial for international markets, as it would give investors greater confidence in the global economic rebound, making them more willing to invest in international markets. In particular, this outcome is seen as beneficial for China and China-geared markets. Indeed, on October 9 , Chinese markets reopened after a one week holiday and the Chinese Yuan saw its biggest daily jump versus the U.S. dollar in 15 years.

Short-term, international markets have been reacting positively to a reduction in uncertainty, achieved via a decisive U.S. election outcome and a Biden victory. The ultimate conclusion of the election story will give international markets a fleeting nudge one way or the other; however, its longer lasting path will be determined by the economic cycle and by structural trends. On both accounts, international equities are on the right path and investors have the opportunity to ensure portfolios have enough exposure to the road ahead and at attractive valuations.

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UBS Likely winners with attractive risk-reward skew:

Markets with greater overseas revenue exposure, especially North Asian exporters, could benefit if the U.S. adopts more multilateral and predictable trade/foreign policy (more likely under both Biden scenarios). On the monetary front, markets with high yield gaps, low current account balances/deficits, and historical sensitivity to the U.S. bond market, could benefit in an environment of easier-for-longer monetary policy (a more likely outcome under the 'status quo' scenario). This would likely benefit South Asia. Finally, stepped up fiscal spending, particularly on infrastructure, would generally favour the Materials sectors, to which Australia naturally has the highest exposure. India, Indonesia and Singapore come out positively in two of the three scenarios, without being relatively negatively affected in the third. Both Indonesia and Singapore are also inexpensive versus their history relative to the region.