UBS: What if Trump wins?

A Donald Trump presidency is no longer as “unthinkable” as some had initially believed. The gap separating the two candidates within the national polls is now within the margin of error. With Trump having wrested away some of Hillary Clinton’s Electoral College advantage, he has now moved within plausible striking distance of victory.

Although Clinton arguably won the first presidential debate by most assessments, her performance was largely in line with expectations. There was no “knockout punch,” and Trump also scored some key points while avoiding devastating gaffes.

If Trump can maintain his recent momentum and convert some of the larger-than-normal pool of undecided/independent voters, he can capture a lead in the “battleground” swing states (where he has closed the gap) and chart a path to the presidency.

What are the risks?

The prospect of a Trump presidency poses two primary sources of risk:

1. Outcome unease. The market is currently pricing in a near-certain Clinton victory, with the Iowa Electronic Markets implied probability at 69%. If this lead narrows, growing insecurity could create a short-term, “shallow” risk for markets, and could be the catalyst for a stock market correction.

2. Policy uncertainty. After markets have settled down following the initial surprise of a Trump victory, the focus of investors will likely shift to the policy implications of the result. Trump’s lack of governing experience and unpredictable style widens the range of potential policy outcomes. This is a deeper and more pervasive risk, because markets tend to demand a higher risk premium for stocks when the policy outlook is murky (see chart). This would hamper equity markets, resulting in a lower equity market valuation.

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