Trump or Clinton means 'downside' for equities: HSBC

Published Mon, Jul 25 201611:42 AM EDT

The market has downside risk the rest of the year due to uncertainty over the presidential election and Donald Trump 's populist economic plan, according to HSBC Global Research. "Increased economic policy uncertainty is typical during an election season, but potentially greater this time given the unconventional nature of the Trump candidacy and high levels of global policy uncertainty," HSBC's chief U.S. economist, Kevin Logan, wrote in a note to clients Sunday. "This could depress investment and boost equity volatility. Simplified U.S. electoral scenarios all show downside to U.S. equities by year-end." HSBC's report comes as Five Thirty Eight's "now-cast" election model on Monday predicts Trump has 57.5 percent chance to win the presidency, compared with 42.5 percent for Hillary Clinton . Here are the details of HSBC's four electoral outcomes. Status quo/gridlock is the outcome with a Democratic president and a Republican Congress. If this happens, the economy will likely be stuck in a low-growth mode and show little improvement in corporate earnings, according to HSBC. "In this scenario there could be modest downside to equities from current levels," Logan wrote. Bigger government is the scenario with a Democratic president and Democratic Congress. This will likely lead to more fiscal spending, larger budget deficits and higher earnings growth, the economist said. "If this results in a less accommodative Fed , a decline in valuation multiples could more than offset the positive impact from earnings. This could result in moderate further downside to U.S. equities versus the 'status quo' scenario," the report said. Mainstream conservative is the scenario with a Republican president and Congress that focuses on lowering tax rates. This policy will boost corporate earnings the most, but will result in higher budget deficits and possibly inflation. "However, if rates rise faster than in the previous two scenarios, an acceleration in inflation could lead to a more pronounced multiple contraction and, therefore, greater downside for global equities," the note said. Populist overhaul is the scenario with a Republican president and Congress that focuses on anti-trade policies. This outcome could lead to stagflation and would hurt multinational companies that rely on cross-border flows. Inflation could rise to 4 to 5 percent by 2018 and valuation multiples would contract, said HSBC. "We see this as the most negative scenario for global equities as the potential disruption to international trade would likely see a spike in uncertainty and a decline in global growth," the report said.

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The market has downside risk the rest of the year due to uncertainty over the presidential election and Donald Trump's populist economic plan, according to HSBC Global Research.

"Increased economic policy uncertainty is typical during an election season, but potentially greater this time given the unconventional nature of the Trump candidacy and high levels of global policy uncertainty," HSBC's chief U.S. economist, Kevin Logan, wrote in a note to clients Sunday.

"This could depress investment and boost equity volatility. Simplified U.S. electoral scenarios all show downside to U.S. equities by year-end."

HSBC's report comes as Five Thirty Eight's "now-cast" election model on Monday predicts Trump has 57.5 percent chance to win the presidency, compared with 42.5 percent for Hillary Clinton.

Here are the details of HSBC's four electoral outcomes.