Criterion: Moth-eaten Aussie investors await US mid-term Butterfly Effect

• Tuesday’s US Congressional mid-term elections are likely to influence global markets, including ours. But how?
• A Democrat ‘clean sweep’ of both houses could weigh on US shares and make Donald Trump’s behaviour even more unpredictable.
• Ultimately, our economy will be most affected by Trump’s policy on Iran and the oil price impact

When a butterfly takes flight in the Amazon, it supposedly causes a cyclone on the other side of the world. The same, too, applies to voters in the swing state of Ohio gently flapping their ballot papers next Tuesday.

Depending on the outcome, the US midterm elections could reshape the nation’s economy and foreign policy – and impact everyone.

That includes moth-eaten Australian investors battling insipid local conditions.

The hard part is gleaning whether the Butterfly Effect will manifest in howling winds of change, a subtle zephyr or a more becalming influence.

Betting agencies favour a clean Democrat sweep of both the House of Representatives and the Senate.

The non-partisan Cook Political Report expects the Democrats to regain control of the House of Representatives, with the Senate race hanging in the balance.

The US share market has priced in the Donkeys (Democrats) prevailing in the lower house, with the Elephants (Republicans) retaining control ‘upstairs’.

Sectors to watch

RBC Capital Markets believes the financial, energy and utility sectors are most likely to be influenced by the result.

These industries are most positively affected by an Elephant stampede of both houses – maintaining the status quo – while healthcare would benefit most from a Democrat sweep.

“Tech is also a sector with a positive tilt in a Republican sweep,” the firm says.

“Overall, our US analysts are modestly positive in a Republican sweep, modestly negative in a Democratic sweep, and neutral in a split.”

The Europe-based Amundi Investment Institute says a Democrat sweep would raise the risk of a more interventionist agenda, with further stimulatory tax cuts becoming less likely.

“As a result, the fiscal stance is likely to remain broadly neutral to mildly restrictive over time, with elevated deficits and debt still providing the underlying backdrop.”

It’s well known that mid-terms drag on the market.

RBC says that during Republican presidencies stocks tend to rise, regardless of the Congress’s balance of power.

But annual returns are stronger when either the Elephants or the Donkeys control both chambers.

Different nation, same concerns

To gauge the pulse of the nation, RBC’s analysts pored over the contents of political ads, town hall rallies, interviews and other video content.

It’s no revelation that inflation, housing and energy costs have dominated US voter concerns – sound familiar? – along with the Iran conflict.

But “we were a little surprised to hear a lot about healthcare, specifically drug prices and insurance-related issues, and note this was central to the broader affordability discussion,” RBC says.

The analysts also picked up “broader vibes”.

“In the Senate videos, we noted an emphasis on bipartisanship and working together to get things done, plus anti-big business, anti-big tech rhetoric on the Democrat side.

“In the House [videos], data centre/AI discussion also ranked fairly highly.”

US-oriented stocks in the firing line

Bluescope Steel (ASX:BSL) this week upgraded earnings because tariffs are favouring the steel maker’s US facilities. Management will be Don-ning their MAGA caps and rooting for the Elephants.

With most of its revenue sourced from the US, CSL (ASX:CSL) has been navigating tariff and drug pricing issues. With a gentler Democrat stance emitting from Capitol Hill, it’s Donkeys all the way.

Global logistics provider Brambles (ASX:BXB) broadly benefits from the “America First” push. But in the US, it’s been held back by soft consumer demand and unrelated pallet-repair capacity issues.

The bipartisan wariness about data centres and AI is being replicated elsewhere, including here.

This suggests investors should be cautious about the the marked-down DC pure-play NextDC (ASX:NXT) and the global, DC-heavy property trust Goodman Group (ASX:GMG) .

Computershare (ASX:CPU) is exposed to US corporate actions such as M&A and thus would suffer from a share market lull. The company derives more than half of its revenue from the US.

Computershare also benefits from higher interest rates on funds held on behalf of corporate clients.

What Donald does next

The key intangible is whether the mid-term outcome accentuates or curbs Trump’s erratic tendencies.

Losing Congress control could make it harder for him to drive his protectionist domestic policies.

That leaves him to get in a few extra rounds at Mar-a-Lago or use his executive powers to engage in foreign pursuits such as … attacking Iran.

A Republican clean sweep – and that’s not out of the question – could empower him to take action such as … fighting Iran.

Or ordering the Pentagon to pull out those dusty Greenland dossiers.

Given Australia’s latest poor inflation numbers, our biggest Butterfly Effect concern is if the delicate cursive strokes of those Ohio voters indirectly fuel further oil price rises.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.

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