Financial markets are under-estimating the chances of Donald Trump winning the US presidential election, as voters remain silent about their support for him.
That is according to Citywire + rated David Zahn, who is head of European fixed income at Franklin Templeton.
In an investor update, Zahn said the attitude of financial markets before the elections are similar to those seen before the UK voted to leave the European Union.
'Just as markets then seemed to have discounted the possibility of the United Kingdom voting to leave the EU, now it feels as though the markets in general are working on the basis that Hillary Clinton will win and feel the chances of Donald Trump getting the keys to the White House are low - although higher than they were.'
'While many opinion polls seem to be giving Clinton the edge, experience of recent elections in other parts of the world suggests there may be some under-reporting of Trump’s support because supporters of potentially divisive candidates may not want to be so public about their support,' he said.
Zahn, who manages several funds including the Franklin Euro Government Bond fund, said should Trump be elected instead of Clinton it will negatively impact Europe.
As Trump believes the US has been too engaged militarily overseas, he may reduce US involvement in global institutions. 'I think, generally, observers underestimate the importance of the United States’ military support for Europe, notably through NATO.'
'For instance, if Europe had to build up its own military capacity to replace the contribution made by the United States, it would place quite a burden on European states, many of which currently spend a relatively small proportion of gross domestic product (GDP) on defence.’
Meanwhile, Zahn said UK Prime Minister Theresa May’s aim to invoke Article 50 of the Lisbon Treaty by March 2017, which would begin the Brexit process, was ill timed due to election campaigns in France and Germany.
'I would question why a leader would start such a potentially bruising process knowing that two of the most important leaders with whom she will have to negotiate will not be focused on Brexit for at least the following six months, and likely even longer in the event of victory by new administrations looking to implement new domestic agendas.'
'Equally, I would think it unlikely that anyone running for office in France and Germany would want to give the impression that they would give the United Kingdom negotiators an easy ride, which could mean the Brexit talks get off to a challenging start.'
Over three years to the end of September 2016 the Franklin Euro Government Bond fund returned 17.78% in euro terms. This compares to a rise of 24.37% by its Citywire-assigned benchmark the JP Morgan EMU Aggregate over the same time frame.