Insider Talk for November 2016: How will a Clinton or Trump win affect your portfolio?

Investing

Insider Talk for November 2016: How will a Clinton or Trump win affect your portfolio?

We ask four wealth professionals how best we should position our investments, depending on who makes it to the White House.

Published on 4 November 2016

The general consensus is that Hillary Clinton is likely to win in the race to the White House and markets will also prefer this outcome which translates into continuation of the status quo, incremental policy changes and lower market volatility.

But how should investors prepare themselves in the event of  an unexpected Trump presidency? We speak to four financial experts on how best to position your investments, depending on who becomes the next Commander-in-Chief.

Steve Davis, Chief Executive Officer, Javelin Wealth Management

A Clinton win is what the markets currently expect and will represent a continuation of the status quo. In the short-term, it will be generally equity-friendly and supportive of infrastructure stocks, given campaign promises to increase spending. It should also be generally USD positive and gold negative.

It should be favourable for Asian and Emerging markets, given the more trade-friendly stance of Clinton when she was Secretary of State (and despite campaign rhetoric to the contrary). In the medium-term, expect more political posturing all round over the debt ceiling, especially if control of Congress remains split between the parties.

A Trump win is not priced in at the moment, so would definitely come as a major shock. The positioning for portfolios would be the exact opposite of the positioning one would adopt for a Clinton win. Expect a short-term sell-off, as markets react to the uncertainty created by the significant lack of detailed policy commitments from the Trump campaign.

It would likely be bad for the USD (as foreign governments begin to dump their holdings of US debt), positive for gold, and bad for countries that are net exporters to the US. The Yen would soar. Global markets would react negatively given the likely increase in global protectionism (trade negotiations would be treated as a zero sum game rather than as a bilateral discussion), and amid concern over the potential breakdown in global security, as historic global alliances are unwound or sidelined.

Notes: Look to Gold and Yen if Trump wins

James Cheo, Investment Strategist, Bank of Singapore

A momentous decision looms for Americans on Nov 8. There was a sense that after the debates, Clinton would win big in the race for Presidency. However, Trump has made a comeback, and it may be too early to write him off.

Markets would prefer Clinton over Trump, but may favour a split Congress to provide balance. A victory for Clinton and a divided Congress would be the status quo and the more probable scenario. This outcome would translate into incremental policy changes and carries lower market volatility.

On the other hand, a Trump presidency has higher uncertainty as his policies are more unpredictable. A Trump win creates the possibility of Republicans controlling a larger portion of the legislation process, giving Trump the ability to make big changes. This uncertainty is unsettling for markets.

Making directional bets on political events is often problematic. The better strategy is to hedge against a potential rise in market volatility – for example, buying equity put options as short-term portfolio insurance – in case there is an unanticipated outcome on Nov 8. This strategy worked during Brexit and could work for the US election, where markets are not priced for November to be more volatile.

It is imperative for investors to keep a longer-term perspective, with a balanced and diversified portfolio. In this way, neither presidential candidate is likely to have a dramatic effect on investments.

Tactically, investors should adopt a more defensive tilt to asset allocation – with a preference of credit over equities. This would give investors the flexibility to raise equity allocation, should the US election outcome throw up any unexpected surprises.

Notes: Keep a level head and think long-term

Andreas Schwarz, Asset Manager, Golden Equator Capital

This could be an event that could finally bring the market down, but only if the unexpected happens and Trump will manage to win the election. However, the odds are against him, which means the markets might keep on stumbling ahead. But with the current developments of the FBI re-investigating Clinton’s emails, I would not be surprised anymore to see Trump winning the election.

Rohit Bhuta, Chief Executive Officer, Crossinvest

The current view is, barring any disaster and despite the FBI’s untimely (and perhaps intentional) announcement, that Clinton will probably come out a clear winner. The attention is increasingly on the Senate race where there are six tight ones of which five are GOP incumbents – the Democrats stand to regain control of the Senate should they win these five seats.

 

Impact of a Clinton win

We believe Clinton would be modestly positive for markets as that would be considered a vote for certainty in the US policies towards the world. More importantly, this would be seen as endorsement of the trade and security policies US has led post-WW2. We believe that the global markets have already factored in a Clinton win and that, barring any significant changes in the Senate and/or the House of Representatives, it will likely be business as usual post-elections.

The most likely scenario, our base case, is that Clinton wins but GOP retains control in the House of Representatives. This, we consider to be the most positive outcome as this would be closest to status quo and allow the US and the global markets to muddle-through as usual. This will also boost a shift away from reliance on monetary policy to greater fiscal spending. At the back of this scenario, we see modest USD gains, continued out-performance by equities and notably Emerging market assets. We think Nikkei can stage a recovery.

Positives

  • Boost in mass consumer spending at the back of reduced taxes for the poorer households
  • Boost in clear energy sector
  • Increased infrastructure spending leading to more job creation
  • Trade remains intact
  • Emerging markets will likely see a relief led by Mexican assets
  • Bond markets may stabilise and a potential bond market crash, averted

Impact of a Trump win

On the other hand, despite this to be an unlikely outcome, a Trump win will be a huge “shock” to the markets. This scenario does not appear to have been factored in as it is not discounted by markets – the reaction in asset prices through currencies, fixed income and equities will likely be both profound and damaging. Trump’s fiscal plans will most likely result in a bond “shock” as US Treasury yields will most likely jump impacting high quality fixed income, boosting USD and damaging defensive bond “proxies”. A more significant impact can perhaps be within the Emerging markets’ fixed income, equities and their currencies which can make the taper tantrum of 2013 look like a picnic.

Trump’s stated policies would upset post-WW2 trade agreements, security alliances and even the sanctity of US treasuries as a safe haven. A Trump win can create deep uncertainty in trade-focused Emerging markets and notably in areas where US security agreements are in place – Japan, APAC and Baltic whilst Mexican assets and currency can be severely impacted. The recently-executed Trans-Pacific Partnership  agreement can be terminated.

All gloom and doom? Perhaps! It is just that a Trump win will lead to significant uncertainty, the knock-on effect of which is unknown.   

Simon Johnson, Massachusetts Institute of Technology economist, stated in the New York Times recently that a Trump’s presidency will “likely cause the stock market to crash and plunge the world into recession.” He predicted that Trump’s “anti-trade policies would cause a sharp slowdown, much like the British are experiencing” after their vote to exit the European Union.

Positives

  • Oil companies and other sectors of the traditional energy industry would be likely to rally given Trump’s plan to repeal regulations (although renewable energy companies will fall.)
  • Healthcare and biotechnology stocks, which have been driven down over concerns that Clinton will seek greater regulation and possibly even price controls, may also do well. Sector-wise, a Trump victory will help infrastructure and defence sectors, large financials, fossil-fuel energy producers, drug manufacturers and high-end consumer plays but it will likely be bad for hospitals (repeal Obamacare), and therefore insurance companies, regional banks and the US exporters can be impacted negatively too.

Notes: If Trumps win investors must review the equity sector allocations as there will be sector winners and losers under his Presidency

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