The pan-European Stoxx 600 index is expected to plunge by up to 10 percent in the event of Republican candidate Donald Trump emerging as a clear winner in Tuesday's election, according to the latest estimates by analyst at Deutsche Bank.
"We project around 5-10 percent downside for the Stoxx 600 in case of a Trump victory, roughly half of that implied from a rise in U.S. policy uncertainty to 2011 debt-ceiling dispute levels. For a Clinton win, we would expect a partial reversal of the uncertainty already being priced, and a rise of around 5 percent," European equity strategists at the bank said in its latest research note.
The note stated that markets across the globe have been jolted by the recent narrowing in polls, adding that the rising uncertainty around Trump's policies would weigh further on equity markets. Trump's plans include significant changes in taxation, immigration and trade which could lead to considerable rise in U.S. policy uncertainty, the note said.
However, the European health care sector is likely to outperform under a Trump win, Deutsche Bank said. The sector has moved inversely to the probability of a Clinton victory over the past couple of months and has performed well in periods of rising macro uncertainty and dollar strength. Meanwhile, energy and banking could suffer under a Trump win, it noted.
"A rise in uncertainty is typically associated with falling bond yields – and we would therefore stay cautious on banks under a Trump win, though under Hillary (Clinton) they may rally in the near term," the note said.
While European investors remain cautious ahead of the election results, analysts have pointed to general risk for all equity markets across the globe in the case of a Trump victory. Andreas Johnson, economist at SEB, the leading Nordic corporate bank, told CNBC via email that a Trump victory would hurt equity markets.
"As polls have shown that Donald Trump's chances have improved, equity markets have retreated while safe-haven assets such as gold have risen. A Trump victory would be a clear risk-off event that would trigger significant reactions and equity markets would take a sharp hit, at least in the short term," he said.
Johnson further explained that emerging market assets look particularly vulnerable as safe-haven flows would put pressure on assets perceived to be risky. "A clear Clinton victory should trigger a short-lived rally," he added.
The research note from Deutsche Bank further explained that Clinton's policies are much less radical than Trump's and have been communicated more consistently. A Clinton victory could remove the current uncertainty premium from markets, it said.
"Clinton's fiscal stimulus proposals are significantly lower compared to Trump's and she would also very likely face political roadblocks in a Republican-controlled House of Representatives. As a consequence, large-scale fiscal stimulus would be even less likely in this scenario," the note said.