Rarely has American society been split to this extent. Two radically different campaigns pitting supporters of sitting Republican president Donald Trump against those of Democrat challenger Joe Biden. Such a sharp division is making it particularly difficult to predict market movements, especially amidst the current health crisis.
So, how, then, to invest one’s assets or quite simply reposition one’s portfolio faced with such uncertainty?
The first challenge: the date on which we will know the name of the new US president. Any tight result is likely to be disputed.
Until then, the uncertainty is bound to bring greater volatility in its wake, i.e., widening the price spreads of financial assets. Investors have already partly priced this in up until polling day at least.
Combating the uncertainty
There are, however, ways of protecting your portfolio against such heightened volatility, allowing us to choose between:
- maintaining the protections (options) on US and European equities to lower the impact of uncertainty on portfolio performances;
- diversifying further into gold, as the yellow metal is an effective hedge in this case;
- underweighting (reducing) US equities and the USD, as the region is no longer the safe haven it was during previous crises. We have also temporarily lowered our exposure to US tech stocks, henceforth more at risk of a correction given their strong performances in past quarters.
Two nominees, two scenarios
Once the new president is known, and depending on the composition of Congress, two scenarios are possible:
- If Donald Trump is re-elected, risk assets in China, Emerging markets and Europe could find themselves under US protectionist pressure, as has been the case these past four years. On the US domestic market, a new Trump mandate would be good for the Energy and Healthcare sectors.
- Joe Biden as the new White House incumbent could have a greater sectoral impact on the US domestic market. Although the effect is likely to be positive on infrastructure- and transport-related sectors, renewable energies and, more globally, on sustainable development thematics, it would equally likely penalise healthcare and energy (oil & gas). Non-US assets could, for their part, benefit from repaired relationships. Europe and Emerging market performance should not be penalised by the unpredictability of political risk.
Our allocation, which will remain flexible and opportunistic, could benefit from corrective periods to strengthen our risk asset (equities and bonds) weighting, provided our economic scenario remains valid.