The US general election took centre stage this week with the first live debate between presidential candidates Hillary Clinton and Donald Trump making headlines. 
While many are pricing in a Clinton win, Natixis chief market strategist David Lafferty is warning that an un-polled minority, such as the one seen during the Brexit vote, could change this.
“The math will tell you that Mrs Clinton is the odds on favourite. She has a big head start in the Electoral College which is a historical bias of the way the electoral delegates are set up,” he said.
“Two other factors that historically have been indicative of who wins are who has more money and who has a better organisation and Mrs Clinton has a lot more money and a lot better organisation.”
He says most forecasters and analysts are pricing a Clinton victory anywhere between 70 and 80 per cent with a Trump win somewhere between 20 and 30 per cent.
“But what they never talk about publicly but what we all worry about is the polling error and it relates back to Brexit and what you guys had.”
During the lead up to the EU referendum, many polls forecast the vote would be split 50/50 with a remain vote slightly more likely (but not by much).
In the end, however, there was a four percentage point swing, with 52 per cent of the voters choosing to leave the EU compared to the 48 per cent that voted to remain.
Performance of index since Brexit
Source: FE Analytics
As the above graph shows, the surprising result had an immediate impact, sending markets plummeting 7 per cent in the two days after the vote.
However, markets have picked up since due to a delay in the processing of Article 50, the flight of investors to ‘safer’ large cap equities and the Bank of England’s monetary stimulus.
While Clinton clearly has a more significant lead than the remain voters had in the UK before the referendum, Lafferty says that using his own data a similar swing in the so-called ‘battleground states’ could be just as significant.
“We’ve got 50 states plus the District of Columbia, but there’s only about five or six states that matter – Florida, Ohio, Pennsylvania, New Hampshire and maybe Colorado and historically Virginia has been in there,” he said.
“Mrs Clinton is either winning or tied in all the battleground states, she’s anywhere from six or seven points up in Pennsylvania to one point up in Florida.”
He says based on this it is easy to see why the polls are pricing in an 80 per cent chance of a Clinton win, but this assumes that the polls are accurate.
“If you begin to take some type of un-polled minority and say that Mr Trump does 1 per cent better than the polls are saying in the five or six battleground states Mrs Clinton still wins,” he said.
“If he does 2 per cent better in the battleground states Mrs Clinton still wins. If he does 3 per cent better - and remember the margin on Brexit was about a 4 per cent swing - then it’s pretty close; it’s about 50/50 and that’s the sort of polling error that we are worried about.”
Indication of voters since Nov 2015
And as the above graph shows, the gap between the Republican and Democrat parties has been significantly reducing in recent months.
So far this year, much of the narrative within the market has been on when the Federal Reserve will next raise interest rates, but Bank of America Merrill Lynch says this has now taken a backseat as the general election race begins to heat up.
“Having been in the driver’s seat for most of the year, central banks can now take a break and wait for the US elections,” it said.
“We have been arguing that markets are under-pricing the risks involved. As the polls now suggest a much narrower gap between the two candidates, we feel even stronger about our concerns.”
“We believe the outcome of the US elections will be the main determinant of how the rest of the year and next year will evolve in markets, while short-term and long-term implications can be very different.”
Featured in the debate, which many agree was won by Clinton, was her health, following a faint and subsequent admission of pneumonia earlier in the month.
Jim Wood-Smith, head of research at Hawksmoor, says this event has put the first element of doubt that a Trump win may be possible.
He said at the time that it makes, for the first time, a Trump win a credible prospect: “Until now we have all been bumbling along thinking that we don’t need to worry too much about Trump.”
He notes that among Trump’s policies include a 45 per cent tariff on Chinese exports to the US, a 20 per cent tax on all imports, detaining and deporting all illegal immigrants, legalising some drugs and getting Mexico to pay for a wall along the border.
“That is deliberately sensationalist on my part. There is much on Trump’s agenda that reads very positively; but my point is how easy it is to make president Trump sound scarier than a night in a tarantula tank,” he said.
So what could happen if Trump were to win?
Mark Burgess, global head of equities at Columbia Threadneedle Investments, said: “There is significantly more uncertainty about a Trump presidency than a Clinton presidency given Hillary Clinton’s support for many of the current administration’s policies.”
“A Trump win will likely lead the US dollar stronger initially in a risk-off, buy dollars move. But it is also bullish for the dollar as protectionism reduces potential output and leads to higher inflation and a more aggressive Fed relative to baseline, for a given level of growth.”
“This is coupled with the population close to full employment and a big fiscal spend to build infrastructure, pushing wages and inflation higher.”
However most agree that whatever the outcome “with Trump's unpredictability it is likely to bring uncertainty to the markets”.
Poll of the presidential candidates
Source: Financial Times/Real Clear Politics
And what if the polls are right, and Clinton wins? Ian Forrest, investment research analyst at The Share Centre, said: “If Clinton does go on to win it is possible that defence sector stocks may benefit.”
“I’d also argue that despite her criticism of pricing in the pharmaceuticals industry, some healthcare stocks may benefit from a Clinton victory due to her commitment to continuing Obamacare.”