Don’t Write Off a Trump Win Yet

So, Clinton’s gonna win, right?

Hmmm. Maybe. Possibly. Probably.

But is it a dead certainty?

Not yet, it’s not.

According to the FiveThirtyEight website, Hillary Clinton ‘only’ has a 64.5% chance of winning, compared to Donald Trump’s 35.5%.

You can see from the graphic below that Trump’s chances surged from late October. The surge started just before the US Federal Bureau of Investigation’s (FBI) reopening of the Clinton email server issue:

US Fed

Source: FiveThirtyEight.com
[Click to enlarge]

With the closure (for now) of the Clinton email server investigation, no doubt Hillary Clinton’s chances will rebound before Tuesday’s (Wednesday Aussie time) election.

Even so, it’s not yet a done deal. It’s also worth checking out the current calculations for the Electoral College vote. The winning candidate needs 270 Electoral College votes to win the presidency.

Today, the forecasts are that Clinton has 290, compared with 246 for Trump:

Electoral College

Source: FiveThirtyEight.com
[Click to enlarge]

The shaded area shows the effective margin of error.

Importantly, given the relatively small margin between the two, if one state with a large Electoral College vote flips from Clinton to Trump, it could upend these numbers.

For instance, Pennsylvania has 20 Electoral College votes. It’s currently counted as a Clinton state. But if it flips, that’s 20 off Clinton’s score, and 20 added to Trump.

Then there’s New Hampshire — also currently a Clinton state, with four Electoral College votes. If that flips, take four off Clinton, and add four to Trump, and whammo, Trump for President!

It’s all coming down to the wire. And it will have huge implications for investors, whoever wins.

For now, while the numbers suggest a Clinton win, we’re still not convinced it will be as clear cut as the markets think. Yes, markets have fallen as Trump’s odds have improved, but, if Trump does pull off the unimaginable, our bet is that it will hit stock markets hard.

At the same time, if stocks fall, another asset should rise in value. That asset is gold. And if gold goes up, we’re banking on something else going up too: gold stocks.

The good news is that the ‘mystery gold stock-picker’ behind our new Gold Stock Trader service says he’s found the best tiny gold stocks to capitalise from any surge in the gold price.

If you think that’s crazy…

If the mere presence of Donald Trump heightens the risks to markets, how about this for a scenario:

As I mentioned above, the US presidential election system uses an Electoral College system. There are a total of 538 electors.

The number of electors per state is determined by the number of congressmen in the House of Representatives and the number of Senators in the Senate.

Each state has two senators, regardless of size and population. The number of congressmen in the House of Representatives for each state depends on each state’s population.

California, the most populous state, has 55 electoral votes.

States with the lowest populations, such as Alaska and Delaware, have just three votes.

But here’s where it could get really exciting. What do you notice about the number of electors?

Think about it.

That’s right, it’s an even number.

That means it’s possible the election could end in a tie — 269 votes each.

In which case, the decision on who becomes president moves to the House of Representatives, where each state delegation gets one vote (26 votes needed to win).

Ominously for the markets, the current House has 246 Republicans and 186 Democrats. According to website 270towin.com, Republicans would likely control at least 24 delegations after the election, with another five in play.

Many folks have said this is the craziest US election in history. If the Electoral College votes end in a tie on Wednesday, Australian time, the election could get a whole lot crazier.

Those no-good banks

If you have any bank shares in your portfolio (who doesn’t?), things aren’t looking good for the future.

As Bloomberg reports:

Westpac Banking Corp. cut a key profitability target, blaming the need to hold more capital and increased regulatory costs after reporting full-year cash profit was little changed.

Return on equity, a measure of how efficiently a company invests shareholders funds, fell 185 basis points to 14 percent, prompting Chief Executive Officer Brian Hartzer to say the bank’s target of 15 percent “is no longer realistic.” Australia’s second-largest lender will now target ROE of 13 percent to 14 percent, it said in a statement to the stock exchange.

But profitability isn’t just about profits. It affects dividends too.

This is where it could get bad for shareholders. From early 2014 to late 2015, Westpac Banking Corp’s [ASX:WBC] dividend edged up from 89.5 cents, to 91.4 cents, to 92.4 cents, to 94 cents.

Unfortunately, that’s where it has stopped. The two dividends since then have also been 94 cents.

That’s not how it used to be for bank stocks. Bank investors are (or were) used to a gradual ratcheting up of dividends…year after year.

Part of this is due to forced capital raisings by the Big Four Aussie banks, as part of local banking regulations and international banking standards.

As Bloomberg reports, ‘Australia’s four largest lenders added a record A$20 billion in capital last year…’

The higher capital requirements hurt the banks’ growth, because, in effect, the banks have to keep more cash (capital) in reserve, rather than use those reserves to create new loans and deposits.

Not only that, but the big banks have to face higher funding costs and higher bad debts. If another report from Bloomberg is any indication, those funding costs could rise further — and so could bad debts.

From Bloomberg:

Australia could be stripped of its top credit score by S&P Global Ratings as early as next month if the government’s interim budget review shows further deterioration, according to BlackRock Inc.

Cue the comedic double-take: Next month!

Yikes.

Aussie interest rates have already spiked higher, even without any official Reserve Bank of Australia interest rate rise. Check out the chart of the 10-year Aussie government bond:

Reserve Bank of Australia interest rate
Source: Bloomberg
[Click to enlarge]

In early September, the 10-year yield was 1.814%. Today, it’s 2.35%.

It’s the same pattern for Westpac’s corporate bond yields. The following is a chart of Westpac’s November 2023, 5.25% bonds:

Westpac
Source: Bloomberg
[Click to enlarge]

In September, the yield fell to 2.583%. Today, it’s 2.97%.

This is, in part, a reflection of expectations that the US Federal Reserve will raise interest rates this year, and the increased risks caused by the US presidential election.

But even the non-indictment of Hillary Clinton hasn’t done much to push yields back down again. Perhaps that shows fundamentals are back in the fore when it comes to banks, their funding requirements, and the impact on their profitability.

Or maybe not. Westpac’s shares were up 2.65% yesterday on news from the US.

What will happen next is anyone’s guess.

Cheers,

Kris Sayce,
For Markets and Money

PS: This is an extract from an article originally published in Port Phillip Insider.


Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Markets and Money e-newsletter in 2005. He is the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service, Markets & Money.


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