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Elections will be held in the US in early November and the outcome of the elections remains uncertain. How can the German economy prepare itself, what scenarios are conceivable and what advice is there for private investors? Our HSBA expert Professor Peter Scholz, professor of business administration with a focus on banking, outlines his assessment of the developments in an interview.
The stock markets are nervous. Is this primarily due to the uncertain outcome of the US elections?
Scholz: I do not think so. Election years are statistically good years, and usually the stock market is on the starting blocks for a year-end rally around the election. At the moment, the nervousness stems much more from the Corona pandemic. Stock markets had underestimated the danger of a new wave in the summer, and this is now coming to bear.
How crucial is the question of whether the next US President will be a Republican or a Democrat, or the fact that a clear outcome may be in doubt? Scholz: If one can believe the polls, the Democrats currently have the slightly better chances, but Wall Street always adjusts in the medium term, no matter which of the two candidates wins. The only surprise could be President Trump's reaction to defeat. The stock markets are certainly a little afraid of a chaotic post-election phase. It should not be forgotten though that the seats in the House of Representatives and partly in the Senate will also be newly elected. For domestic politics, it is very important to get majorities here too, because otherwise governance is going to be very tough. So, when it comes to elections, it is not only the president that counts, and that is something we must not forget!
Financial experts like to think in scenarios: What (long-term) scenarios are conceivable if Trump remains president or in the event that Biden is elected? Scholz: Right now, Wall Street is adjusting to the predictions. Basically, Trump was not unpopular on the stock market simply because he deregulated heavily and lowered taxes. Biden, on the other hand, has frightened investors with plans for tax increases. However, it is becoming apparent that Biden is more willing to compromise than expected and there are doubts about Trump's leadership abilities in the Corona crisis. This is probably why Biden is now more favoured on Wall Street. In general, Wall Street performed better under Obama and Clinton than it did under Bush. At halftime, Trump reached an average score. So, Democrats have been anything but bad for the stock markets in recent decades.
Are there any market segments that are likely to be particularly affected?
Scholz: Under President Trump, traditional industries such as oil and defence, but also the high-tech sector, are likely to be better off. Although Biden is somewhat hesitant about positioning himself for a clear Green New Deal, the sustainable energy sector is likely to win under his Presidency. In addition, infrastructure stocks should win if he delivers on his election promises.
Sustainable investments are in great demand now. Will the issue continue to gain momentum regardless of the outcome of the election?
Scholz: Yes, sustainable investments are a megatrend and there are certainly some pearls here that are worthwhile for a long-term portfolio. However, stock picking is difficult because it is often difficult to predict which technologies will prevail. However, an ETF is a good way to invest in the sustainability trend if you do not feel confident enough to make an individual selection or if it is simply too risky. I would not limit myself to the USA here either. Besides digitisation, this is a global trend.How do you estimate the short-term and long-term impact on the currency markets? Will the US dollar appreciate if Trump wins? And what consequences would this have for the German economy? Scholz: The main driver for the economy and thus the currency markets will be the reaction to the Corona pandemic. In principle, I believe that Biden has a better strategy than Trump. However, in my view Europeans are reacting badly to the crisis. Therefore, assuming that Biden manages the crisis well, I see a stronger dollar under Biden than under Trump.Do you think there will be a crash on the stock markets? And how can you position yourself well as a (German) investor? Scholz: There could be a market crash, but probably not due to the elections. Unless there are lasting disputes about the outcome of the election of course. But so far, stock markets have just flinched for a very short time about the corona pandemic, only to quickly return to old highs. I have been feeling uneasy about this all summer. Depending on the severity of the second wave and how tough the measures are, it will have a considerable impact on economic activity and therefore on the stock markets. If the V-recovery turns into a broad U, it will certainly have an impact on prices and in the worst case trigger a crash. What the politicians are currently trying to do is an open-heart experiment. And unfortunately, in my view, they are not doing a good job: entire sectors of the economy are being scrapped out of a desire to distinguish themselves. It is all too easy to forget what has driven our development in recent decades and we are far too willing to give it up.
Prof. Dr. Peter Scholz has been Professor for Business Administration Theory with a focus on banking at HSBA since 2013. Furthermore, he is the Academic Head of the MSc Finance. Professor Scholz has presented his research findings on investment certificates and timing strategies at several international conferences, including the Research Conference ‘Campus for Finance’ at WHU Vallendar, the Midwest Finance Association in New Orleans and the Southern Finance Association in Charleston.