What to do about the US election: 7 managers’ tips

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(pictured: Hiliary Clinton and Donald Trump)

Historically, US elections have not mattered much to either the US – and therefore global – economy or to markets. But this one is so extremely polarising and Donald Trump so unpredictable, that many investors are looking to hedge their bets on the off-chance of a Republican victory. Here are some tips from seven global and Australian managers.

  1. Joseph Amato, the CIO, equities, for New York-based Neuberger Berman , wrote recently that as far as this election is concerned, it’s hard to tell what the impact will be.

“Over the last eight presidential election cycles, inauguration years have seen exceptionally strong returns for the S&P 500, with an average gain of nearly 20 per cent and in several cases returns of over 30 per cent. Only in 2001, in the wake of the tech bubble, did the year turn out to be negative.

“In part, this positive trend may be a function of stimulus leading up to elections, or reduced policy uncertainty, or simply a touch of optimism tied to the fresh start of a four-year term. It may be a simplistic idea, but elections ultimately have tended to be a catalyst for stocks.”

He also asks: could this time be different? A key concern is negative voter perception of both Hillary Clinton and Donald Trump, who have the highest unfavourable ratings of any presidential candidates in modern history. Regardless of who gets elected, residual anger on the part of the losing party could intensify already entrenched gridlock.

Neuberger Berman predicts the economy will continue to stumble along at 1.5-2.0 per cent GDP growth, providing little fuel for the stock market.

Amato says: “It would be tempting to minimize the potential impact of the presidential race, to ‘change the channel’ and focus strictly on fundamentals that undoubtedly can sway the markets. But there’s a point where electoral combat and likely gridlock weigh on earnings prospects and growth trends. My ‘Hail Mary pass’ would be that this contest will shake things up enough that politicians will work together, at least for a while, to deal with entrenched problems.”

  1.  Capital Group, a big West-Coast-based manager, also points to the history of elections not having a decisive impact on markets one way or the other – perhaps hopefully.

In a recent client note the manager says investment success depends more on the strength of the US economy than on which party occupies the White House. Whatever the outcome, we believe the impact on markets will be about the same.

“The bottom line: Presidential campaigns draw the public’s attention to bad news, which can be a serious distraction for investors. But those who tune out from the noise, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true during presidential elections — and any time of the year,” Capital says.

  1. With the final result tight, many investors predict market volatility in both the run-up to the vote and during the immediate aftermath, whatever the outcome, but particularly if Donald Trump is victorious.

Ian Rees, head of research at Premier Asset Management, commented: “You have to be alert to the election’s importance to the world economy; it is more important globally than Brexit. You have to be prepared for markets to move in a volatile fashion over the next year.”

  1. From an Australian perspective, with a greater exposure to China than most other countries, Aussie equities manager Jamie Nicol, of DNR Capital, says Trump “certainly won’t make markets great again” but the negative impact of him winning is unlikely to be as calamitous for world markets as some fear.

“We certainly expect markets to react negatively to a Trump victory because of the greater certainty and experience Clinton’s background provides, combined with the risks to international trade levels posed by Trump’s trade barrier rhetoric,” he says. “It should not be forgotten that the Great Depression was exacerbated by a downturn in international trade in the 1930s.”

From a political viewpoint, one of the great unknowns is the likely composition of the voter turnout. Will Trump attract people who normally do not vote? The surprise result for Brexit, Nicol points out, was off the back of many new and irregular voters who felt the system had failed them.

“But, like Brexit, we would expect a Trump-induced downturn to be short lived, as there is little Trump could achieve in his first few years at the helm, given his lack of ready-to-go policies, his lack of relationships with key policy makers and the need to manage any policies through the Senate and Congress. In summary, we assume many of his stated ‘policies’ would be heavily watered down.”

Specifically for Australian investors, Nicol says that accelerated US infrastructure spending by Trump and a stronger US dollar would be positive for companies such as Macquarie Bank and Lend Lease and tax cuts positive for other companies operating in the US.

  1. Kumar Palghat, CIO of Australian-based international bond manager Kapstream, says that Australian investors should buy some “out-of-the-money options” if they think there is a reasonable chance of Trump being elected, to hedge against the expected volatility in the election’s aftermath.
  2.  Peter Warnes, Morningstar Australia head of equities research, told investors last week that he held some gold in his personal portfolio. “If Donald Trump gets elected, you’re going to want some gold,” he said.
  3. And Robert Mann, an Australian portfolio manager in charge of Asia ex-Japan equities at Nikko Asset Management in Singapore, says the Nikko portfolios are set up to outperform in down markets. So he has bought some December puts to sell the S&P 500 at $21.50 which offered cheap protection against a US post-election market fall.

He adds that investors should be “very careful” about taking bets on other country’s politics as a general rule. “It’s hard stuff to call,” Mann says.

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