There could be some sort of contestation following the US results and that could mean more volatility in the markets. Analysts say that there has been a Trump trade. But help us understand the likely outcomes and their impact. Are you factoring in a Republican sweep or a split congress and what really would make the markets happy?Arnab Das: First, I would comment on whether it is a disputed election. I would just say a couple of things. There are polls that are indicating this or that candidate is ahead at this or that time. Almost all of them have been in the margin of error. So, the polls are not generally a very good guide. There is one very interesting poll for the state of Iowa that shows Harris with a I think it was a three or four percentage point lead over Trump in a solidly red state and that poll I think is an important outlier. It has generated a lot of discussion and a lot of soul searching throughout the US because that poll correctly predicted the outcome pretty close in terms of the margin in each of the last four presidential elections.
So, you can also make the case that it would not be that close and so this is another way of saying we do not really know what is going on because there is so much that is so unprecedented in this election. Joe Biden stepped down. President Trump is running for office again after leaving office the first time since Grover Cleveland. So, a lot of stuff that is very new, very different.
For the markets, there had been a bit of a Trump trade as a result of the polls swinging towards him, as a result of the election odds swinging strongly in his favour very recently until the closing days of the election and in that period the odds have really narrowed quite a bit across all the prediction market election betting sites and the Trump trade originally, the pro Trump trade took the form of a stronger dollar, higher yields and a steeper yield curve on the view that policies under Trump certainly assisted if there is a clean sweep.
But even if not a clean sweep, policies would be somewhat inflationary or reflationary or stagflationary, perhaps, depending on how it was all done. And the kind of narrowing of the polls, the narrowing of the betting odds have taken some of that out of the market. Past election data has shown that markets have given positive returns, even though there might be a slight bit of volatility in the near term. You spoke about the impact of a Donald Trump presidency but will there be policy continuity if Kamala Harris gets voted to power because we were just listening to her bites and she said that she is going to be presenting a different sort of leadership from President Biden. In that scenario, what are you factoring in?Arnab Das: The disposition of the Congress matters quite a lot. Broadly speaking, what you could say is that it is a bit oversimplified, but in broad terms, the President needs the Congress on side to make anything significantly different when it comes to domestic policy and has much more latitude in foreign policy. So, national security, trade and immigration and other such areas. Of course, there are constraints, checks and balances everywhere you look, but that is broadly the difference. It would appear that Harris is much less likely to have a clean sweep than Trump, but even Trump is not very likely to have a clean sweep. So, the Senate seems quite likely to flip from Democratic control to Republican control. The House is probably a bit of a toss up, but it is probably more likely to go flip towards the Democrats. Of course, if Trump wins, there is some chance that he would have a clean sweep. Now, how do you translate that into policy and into the markets? Although Harris is trying to both distinguish herself from Biden because she has to be her own president, her own type of leader, she also stands for a good deal of continuity in many respects and there was some degree of continuity between Trump and Biden as well. But it is fair to say if we get President Trump, it will be disruptive as far as the rest of the world is concerned and maybe to some degree disruptive as far as the US is concerned because of this point that there is much more latitude on foreign policy and because as we all know, the one consistent thing about Trump’s policy is that he is a protectionist and rather than an isolationist, he is a unilateralist.
Harris is much more of a multilateralist, much more rules-based person, whereas Trump likes to flag in the face of the rules and be disruptive. So, in that way, a Trump presidency would lead to even more America first markets. He would do things to try and boost the growth rate in the US, try and control the inflation rate in the US and try to re-shore and re-industrialise. Harris is probably going in the same direction, but with much more care and much more gradually.
What about the outlook on China? Largely, the United States policy has been unified, given that both sides have an anti-China stance. Trump’s side is more hawkish, but will his approach be more confrontational, more competitive or cooperative? And on the basis of that approach, what is the impact on India and China plus one?Arnab Das: Before I come to that, I must say a word as well on the Electoral College question. It is important to recognise that the United States is not a pure democracy. It is a republic. That may sound like a distinction without a difference. But the difference in this context is that a republic protects or seeks to at least protect small groups and minority groups against majorities to avoid majoritarianism. Whereas in a democracy, you really have majority rule and that is the kind of the core function of the Electoral College besides a sort of elitism is also part of the logic of the Electoral College.
But the underlying political logic is to give protection to small groups, small states against the majoritarianism of the big states and the highly populous states and that is precisely what is going on with President Trump. President Trump has been taking a divide and conquer strategy, going for Electoral College votes and ignoring or even going against the majority vote. In order to do that, he has been exploiting the famous polarisation in the country and that is why it has been possible for him to win the Electoral College while losing the popular vote.
Will the China factor and the China plus one push and whether that will get further momentum?Arnab Das: Both the presidents will be America first oriented and pushing against China. The difference will be that President Trump will approach it significantly, if not mainly through tariffs. He calls himself tariff man all the time. Whereas with President Harris, you would see more targeted tariffs as opposed to across-the-board tariffs and a lot of non-tariff barriers that are more targeted against national security issues.
Whereas with Trump, it will be much more generally economic and about trade with an important military, industrial, national security emphasis there as well. Also with President Trump, it would not be just about China. It will be about many of the US’ trading partners, especially the countries like the Eurozone and Japan, parts of the world that have large surpluses with the US. India is probably a large economy that is the most hedged because India has no goods surplus with the US. It has been much more of a services surplus and that has been bit of an issue. Of course, there is an increasing closeness between the US and India because of China, which will continue.
