As market participants digest the potential implications from the UK’s decision to leave the European Union, it would be tempting to believe that this is the largest threat facing global trade and the world’s economy.
Market nerves since the Brexit decision have been on edge. The CBOE VIX – which measures the implied volatility of S&P 500 index options – fell 42% last week.
While this certainly highlights market concerns of economic instability, some investors believe there is one, much bigger threat looming on the horizon: The result of the forthcoming US election.
Paul Singer – the founder of US $27 billion hedge fund Elliott Management is one of the many high profile names making warning noises. According to a Huffington Post report, the activist investor and Republican Party donor has suggested that a Trump presidency could trigger a widespread global depression.
There are plenty of high-profile critics. BlackRock CEO Larry Fink has criticised Donald Trump’s opinions on American free trade.
In an interview with CBS News, Fink said: “We are the largest exporter in the world. We're also the largest importer in the world, and so we depend on global trade”.
He claimed that the US election is in a basket of uncertainties that could encourage people to refrain from making long-term investments which would have serious repercussions on the global markets.
Mainstream buy-side firms are now joining the chorus. Yesterday, in a press briefing in London, Dutch asset management group NN Investment Partners said US elections have the potential for a “much greater effect on the global economy than Brexit.”
The group’s head of multi-asset - Valentijn van Nieuwenhuijzen - told journalists: “The US economy is clearly a much larger component of the global markets and candidates in this upcoming election have inconsistent ideas concerning foreign trade.”
Van Nieuwenhuijzen suggested that considerable strain on the United States’ relationship with China was likely if Trump comes out on top. Trump has stated that trade laws with China are in need of reformation and Van Nieuwenhuijzen saw this as potentially harmful for global trade as a whole.
Admittedly, the political ramifications of Brexit look harsh. New regulation or deregulation will have to be implemented on trade laws concerning the UK and the rest of Europe, as well as another election for Prime Minister. The economic reality is relatively unknown at this point and implications are still playing out, but we have already seen a sharp decrease in the FTSE 250 and the pound has dropped.
Despite all of this, experts STILL believe that the US Election result could send a larger shockwave through global markets.
Personally, I believe that while any outcome in the US election may cause problems, people underestimate the resilience of the global economy. The FTSE 100 (which admittedly is less impacted by the Brexit decision than, say, the FTSE 250) has already seen a slight increase since the EU referendum results and the NASDAQ and S&P 500 have been holding steady.
Regardless of who gets elected, I see the equity markets remaining stable in the long term, and US bond yields recovering from recent depreciation with correct fiscal policy.
So while the world looks at the VIX and considers the current level of uncertainty, they should not ignore Brexit and not ignore the US election, but rather remain confident and have faith in the economy. We’ve handled two world wars, an economic depression, and even the black plague. I think we can handle Trump and Brexit.
Conner G. Guidry