The US presidential election is likely to be the most significant political event of 2020, but a variety of other geopolitical risks, including the trade war and the protests in Hong Kong, also are likely to impact global markets. Find out what these major risk events could mean for investors.
The US‑China trade dispute was a key driver of market volatility in 2019, as seen in the fluctuating fortunes of the companies most directly exposed to the Chinese market. After stumbling sharply in August, following a US announcement it would raise tariffs on an additional US$300bn in imports, China‑related stocks subsequently rallied along with the broader market as hopes rose for an interim trade agreement. While there are signs the US and China could finalise a short‑term deal that boosts sales of US agricultural goods and rolls back some tariffs, the underlying conflict is unlikely to be resolved in 2020. On some core issues, such as technology subsidies, we think compromise may not be possible at all. For example, we do not think China will back down on its long-term strategic goals in areas such as AI, robotics, electric vehicles, and domestic semiconductor production. In our view, China will never agree to a deal that ends its state support for these key industries.
The mass protests in China’s special administrative region began in reaction to a proposed extradition law allowing residents to be tried on the mainland but have evolved into a movement demanding democratic political reforms. While the disturbances clearly have had a negative effect on Hong Kong’s economy, the impact on China as a whole has been difficult to distinguish from the trade‑related and structural issues slowing growth. It also remains unclear what steps, if any, Beijing might take to restore order. As things stand now, we are uncertain what a reasonable outcome in Hong Kong would look like.
We think equity markets may be underestimating the potential impact of the 2020 presidential race on tax rates, regulation, and companies in the healthcare, energy, and financial services sectors. We’ve been surprised by the market’s lack of concern so far, as we believe the election has the potential to be very disruptive for many sectors.
Part of the political backdrop to the 2020 election is the debate over the rise in income inequality that has accompanied the free-market reforms of the past four decades. Although these structural changes have boosted growth and lowered inflation, the benefits have not always translated into rising wages and living standards. While economic anxiety has helped fuel populism, the political appeal of candidates promoting tighter regulation and income and wealth redistribution poses the more immediate risk to markets, in our view. We think the odds are about even that such a candidate will win the Democratic nomination. While a Democratic president would probably find it difficult to push a left‑leaning legislative agenda through the US Senate, we don’t see potential regulatory changes by such an administration – such as stricter limits on oil and gas fracking – being priced into the market. This gives us reason to be a little more cautious.