When looking at the National People’s Congress in China a ‘big bang’ in policy support would be a major surprise. Instead, ‘proactive prudence’ seems to be the name of the game, and anything more than a moderate fiscal stimulus and some trimming of growth numbers would come as a major surprise. This is in stark contrast to the US, where proactive prudence would sink any election campaign given its lack of appeal to voters.

Instead, the noisy, messy process in the US will dominate headlines. Our first take on a potential election outcome sees the advantage with Trump, but there is still a long way to go. If he were to win, the outstanding question would be about the size of the mandate to the Republicans. A full sweep, i.e. the presidency plus full Republican control over Congress, would be a game changer, to which we attribute 40% odds for now. All other scenarios, including a full sweep by the incumbent leadership, would be less spectacular.

US elections 2024: Policy directions and market impact

This week’s ‘Super Tuesday’ is a crucial moment in the US electoral process. It marks the busiest day of the primary season, with voters across 15 states and one territory selecting their preferred presidential nominees as well as candidates for other key races. Although the US presidential election is still eight months away, investors are already closely assessing potential policy shifts and how they could affect financial markets.

Current polls suggest that incumbent president Joe Biden (Democratic Party) and former president Donald Trump (Republican Party) are the frontrunners to secure their respective party’s nomination. Their fiscal, trade, and geopolitical agendas, along with the degree of social and political stability in the country, will all have an impact on the US economy.

How will US politics impact key areas?

Fiscal policy

While Biden and Trump follow very different approaches, in general we expect no major differences in terms of US trade policy and geopolitical views. When it comes to fiscal policy, both candidates showed a remarkably strong preference for expanding fiscal policy when they took office. It is highly likely that Trump will feel less compelled than Biden to rein in the currently expansionary fiscal policy.

Fixed income

In the fixed income space, the fiscal debate is also decisive, and rate volatility is likely to remain elevated. In our view, there is little room for credit spreads to tighten further, and the risk of some widening in the run-up to the elections is not negligible.

Equities

In equities, the actual market response to key policy initiatives can sometimes be the opposite of pre-election expectations. Of greater significance for general sector positioning, however, is the underlying economic and market backdrop. During an election year, equity volatility tends to increase around mid-year, towards the end of the election primaries cycle, which should open up opportunities for investors.

China: National People’s Congress – what to expect?

The annual session of the NPC began in China on March 5. The focus will be on the presentation of key economic targets and policy priorities. We expect a more moderate growth target and slightly more expansionary policy, focusing on stabilising the economy and enabling high-quality economic growth.

At the opening session of the NPC on Tuesday, Premier Li Qiang delivered his first government work report, outlining the key economic and policy targets for the coming year. At the Central Economic Work Conference in December, the Chinese leadership acknowledged the challenging economic and external environment and set its priorities on stabilising the economy and achieving high-quality growth, supported by a continued proactive fiscal policy and prudent monetary policy. Thus, policies are expected to remain accommodative and fiscal policy targets may be slightly more expansionary than last year. Strong monetary easing, on the other hand, is less likely due to the negative interest rate differentials with the US and concerns about capital flight.

China’s policy priorities: Innovation and investment

Policy priorities are likely to remain focused on more government-driven investment impulses, focusing on supporting technological innovation and upgrading the manufacturing sector in line with the government’s efforts to promote high-quality growth. However, a large, broadbased stimulus package or major reforms to address the structural imbalances in the economy are unlikely. Thus, no aggressive boost of short-term growth that would also provide an extra growth impulse to the global economy is to be expected.

With the Chinese economy’s key growth drivers continuing to face headwinds and policies remaining focused on containing downside risks rather than providing a big growth boost, achieving a similar pace of growth to last year will be challenging. This is especially true as, in addition to the existing growth challenges, the pent-up demand, reopening effects and favourable base effects that supported the economy and growth last year are fading. We therefore expect policymakers to set a more moderate growth target of 4.5%–5% for 2024, lower than last year’s growth target of ‘around 5%.

What does this mean for investors?

Global investors will find it hard to keep their eyes on the ball in the days ahead. Yet the political headlines will likely be as dominating as they are irrelevant. More relevant important data points this week include US nonfarm payrolls, leading indicators, and the European Central Bank’s rate decision.