It’s US election day (later tonight), and this one appears to have ASX investors a little jumpy.

The ASX Emerging Markets Index fell by 5.94 per cent last week, leading broader declines at the big end of town which saw the ASX200 lose almost four per cent.

To help investors get a sense of what might happen, UBS analysts outlined a three-step results framework once the votes are tallied up:

1. Trump wins again, and the Republican party maintains control of the Senate
2. Joe Biden wins a “clean sweep”, with the Democrats taking control of both Congress and the Senate
3. Biden wins, but Republicans maintain control of the Senate.

Of those three, UBS said option 2 will have the most positive flow-on effect for Australian stocks.

However, those gains will be tilted towards the big end of town (rather than small caps) for two reasons:

Reason 1: Control of both houses will give the Democrats a passage to pass tax reforms. Biden has flagged an increase in the corporate tax rate from 21 per cent to 28pc.

While higher tax rates may drag on US corporate earnings, “it would make Australia a relatively more attractive place to invest”, for large capital flows, UBS said.

Reason 2: Concurrent to a corporate tax hike, the Democrats have also flagged a huge lift in infrastructure spending.

Over 10 years, spending outlays of $US5.4 trillion are expected to exceed forecast tax increase of around $US3.6tn. That could result in a “temporary rotation from Growth to Value”, UBS said.

In such an environment, cyclical stocks such as the big banks may benefit, while “health care, retail and tech could underperform”.

If the election ends in Result 1 or Result 3, the UBS framework favours ASX healthcare, discretionary retail and tech stocks.

The big (Senate) question

For investors trying to price election risk, the betting markets are leaning towards Biden.

If the pollsters and bookmakers prove correct and Biden wins, point three in the UBS framework is shaping up as a most crucial variable.

UBS said betting markets are pricing an 85 per cent chance Biden’s Democrats will maintain control of Congress.

But when it comes to the Senate, it’s close to a 50/50 split — with Democrats holding a slim advantage with a 58 per cent probability.

And a Biden presidency with a Republican Senate brings its own set of investment ramifications because without control of the Senate, the Democrats may be blocked from implementing their tax and infrastructure policy agenda.

Such an outcome may give rise to a “relief rally” in tech/growth stocks, which have taken a hammering in the lead up to the election.

So for ASX small cap investors with portfolios tied to the booming growth in tech and ecommerce post-Covid, the Senate race may be the key variable to watch.

Looking at historical data more broadly, UBS said US elections have typically been a positive catalyst for the local market.

Since 1992, the ASX200 “has on average rallied seven per cent in the three months after the US election”, the analysts said.