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US elections: Middle Eastern investors adopt a cautious approach

The majority of investors in the Middle East have a long-term investment horizon, with investment behaviors generally unchanged, says Edris Alrafi from Aberdeen Standard Investments.

US elections: Middle Eastern investors adopt a cautious approach

The US elections have been a constant headline over the last few months. In addition to the pandemic, investors are also factoring in the US elections in their allocations.

The majority of investors in the Middle East have a long-term investment horizon. Their investment behavior is generally unchanged as they do not typically make significant changes to their asset allocations in light of an upcoming election, said Edris Alrafi, head of Middle East and Africa at Aberdeen Standard Investments.

‘In recent years elections and other political events have proved increasingly unpredictable and even the subsequent market movements can be difficult to predict. For example, the scale of the equity rally in the aftermath of Trump’s election in 2016. With this in mind, we expect investors in our region to take a cautious approach through to the end of the year.’

According to Alrafi, investors in the region in the most part have not specifically hedged or diversified to mitigate the anticipated risks therefrom. However, he has seen decisions being delayed until there is greater certainty in both the Covid-19 situation and the US election.

Several key concerns about the election still remain in the investor’s mind—especially for those who have US exposures in their portfolios—as varying elements come into play in assessing different results.

‘The fiscal policy outcome for either winning candidate will depend crucially on congress,’ said Alrafi. The firm’s scenario analysis suggests that different configurations of the White House and Congress could produce wildly different outcomes altering the fundamental composition and outlook for fiscal policy.

The most substantial shift in the shape of fiscal policy would come through a Democrat clean sweep with Joe Biden in the White House and Democrats holding a majority in the House and Senate.

According to Alrafi, this will bring the most significant change in terms of composition of tax and spending, with winners likely to be low-middle income families and corporates with wide margins exposed to key spending areas like healthcare, education and infrastructure.

Currently Aberdeen Standard’s base case and with just under 100 days to go, the firm holds a 35% conviction in such a scenario materializing. In this scenario, it also matters to investors who makes up the Democrat majority in the Senate. Senators from states with a stronger Republican lean or who are themselves centrists may balk at significant tax hikes.

‘Without a Democrat majority in the Senate, we think partisan politics is likely to create gridlock and risk a sudden stop to fiscal support when the US economy needs it most. This is our second most likely scenario at present, with a 30% probability,’ Alrafi said.

In a Republican ‘clean sweep’, Alrafi expects a gradual tightening of fiscal policy particularly in government spending—albeit retaining flexibility around coronavirus events—while taxes would remain low and likely grind even lower.

‘We put the probability of this outcome at about 10%, given the challenges Trump is facing with coronavirus, the nature of the Democratic House election and voter demographics,’ he added.

In a situation where Democrats hold onto their majority in the House but Republicans have the White House and Senate, the Middle East lead expects policy negotiations to be more challenging but with a likelihood to result in greater government spending depending on how the politics of bipartisan budget negotiations play out.

The firm has placed a 25% probability of this outcome given the benefit Trump has as an incumbent, how polarized voters are in the US and the ability of the Republican party to run effective campaigns, particularly online.

Alrafi said that investors in the region are some of the most sophisticated globally. He has seen a significant move towards best practices over the last decade. They have learned from previous crises that difficult environments present opportunities.

‘Some of the organizations in our region have been nimble and captured distressed opportunities. Others have implemented tactical asset allocation changes and tilted their portfolios towards equities to capture some of the recovery.’

The scale of many investors in the region also mean that they have the resources to develop specialization across asset classes to ensure they are able to source and capture the best opportunities available at any one time.

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