The outcome of the US Presidential elections, without a doubt, will have a consequential impact on the world. Whether its Donald Trump or Joe Biden, the person who wins the elections will be running not just the US economy but will have the power to negotiate deals with other powerful economies.
Though the United States only makes for 5 percent of the world's population, it generates over 20 percent of the world's wealth. It is home to many large corporations, whose products we use in our day-to-day lives like Microsoft or Google. The country also provides the greatest amount of international aid.
All of this means that the policies developed by the next American President will have global economic implications.
The stock markets have already reacted ahead of the elections. On Wednesday, the US stocks fell sharply with the Dow Jones Industrial Average falling 3.4 percent or 943.24 points, largely as a reaction to the increase in COVID-19 cases.
According to data compiled by Bloomberg, BSE's Sensex has declined in the five trading sessions after the US Presidential elections.
Risk of markets staying volatile after 3 November
The current American President and Republican candidate Donald Trump has questioned the validity of mail-in votes and even declined to commit to accepting the results at one of the presidential debate sessions. Trump believes that mail-in ballots would lead to election fraud.
In an interaction with CNBC, legendary investor Mark Mobius said that if the upcoming US Presidential Election ends in a contested outcome (that is if the losing candidate refuses to concede or questions the legitimacy of the results), it would have a dramatic effect on the stock markets.
While volatility will pick up as 3 November gets closer, it will remain volatile following the Election Day if the results of one or more American states will have to be decided in the courts, as it will only raise the uncertainty.
US election impact on India
Over the last few years, the US has become a top trading partner for India with bilateral trade between the US and India standing at $88.75 billion for the financial year 2019-20. The winning candidate will not only affect the Indian economy via policy stance and trade relations but will affect US' support in India's relations with its neighbours.
A UBS analysis of the potential impact of the elections shows that India will benefit in each of their three likely scenarios: a Biden and Democrat sweep, a Biden victory and divided Congress, and a status quo Trump victory. The study, which was published last month, takes into account factors like trade and foreign policy, US Federal Reserve policy and fiscal spending on infrastructure.
US election impact on Europe and China
Relationship between the US and Europe have been bitter under the Trump administration with clashes over trade, defence and technology. The European Union, amid contracting economic growth and a spike in coronavirus cases, is watching the US elections closely in hopes that the tensions will ease after the elections.
As for China, a second Trump term would mean further restrictions and tariffs over trade and investments related to China, especially since he blames the country for the coronavirus crisis. However, some analysts believe that Biden's policies towards China would not be substantially different from Trump as the western coalition has always wanted to manage the rise of the second-largest economy in the world.
The recent death of Supreme Court Justice Ruth Bader Ginsburg has dimmed hopes of Congress passing an economic stimulus bill before the November election. In fact, Donald Trump has acknowledged that the additional stimulus package to help the coronavirus-hit US economy will only come after the elections.
"After the election, we'll get the best stimulus package you've ever seen," said Trump at a press briefing on Tuesday.
The delay in additional stimulus to support the ailing US economy, which is facing a high unemployment rate, has been dictating the stock markets since September.
Whatever the outcome of the elections, once the elections are over, India and the global stock markets will recover. The stock markets, like human beings, are resilient. There may be short term volatility as a movement in the US and European stock markets due to the presidential elections will be reflected in India as well, however, as the rest of the year and following months unfold, the current election's impact will be minimal on your investments.