Fund and wealth managers are advising investors to remain patient amid the unexpected uncertainty of the US presidential election and the likely market volatility that will emerge in the absence of a clear winner between Donald Trump and Joe Biden.
At the time of writing, the presidential race is deemed too tight to call with six crucial swing states yet to declare their results. Furthermore, it is unlikely that Democrats will gain control of the Senate, casting doubt on the likelihood of the Blue Wave that was predicted by pollsters and priced in by traders and investors.
Consequently the scenario has been described as “the worst outcome for the markets” by Adrian Lowcock, head of personal investing at UK investment platform Willis Owen.
In light of short-term volatility, investors are being advised to exercise patience. As Legal & General Investment Management’s chief investment officer Sonja Laud highlighted, Biden’s late night statement commending the patience of his supporters could just as easily have been addressed to global investors. “Market participants will need to hold their nerve over the coming hours and days, with a clear premium on patience,” said Laud.
In the meantime, there will be some negative scenarios to navigate. The prospect of drawn-out legal battles to decide the remaining votes has echoes of the 2000 election when three weeks of court hearings saw the S&P 500 fall 8.09% and the FTSE 100 go down by 4.9%.
A further negative is a likely delay to a much-needed fiscal stimulus programme.
“From the point of view of equity markets a divided Congress at this point is the least desirable scenario, independently from which side wins, as this could mean delays in policy execution and in what we believe is a much needed stimulus package in the near term,” said Fabiana Fedeli, global head of fundamental equities at Dutch fund manager Robeco.
This delay could have a negative effect on the US economy, consumption and growth stocks meaning that the next stage of global equity upside will have to come from more cyclical stocks, says Fedeli.
Meanwhile in fixed income, there was a big rally in ten-year and 30-year treasuries overnight, in part in reaction to the prospect of less fiscal expansion, said Jim Leaviss, CIO of public fixed income at M&G Investments. “But it also reflects the value of treasuries as safe-haven bonds, particularly as we continue to have volatility around the overall result. German bunds are also doing well this morning [Wednesday 4th] as another safe-haven asset,” he adds.
But while some active managers, such as David Zahn, head of European fixed income at Franklin Templeton, believe that volatility in the credit markets creates opportunities to add money to assets, others have used the current uncertainty as a vindication of a non-political approach to investing.
“This is why we don’t mix portfolio positioning and political events,” said Ben Kumar, senior investment strategist at UK wealth manager 7IM. “Regardless of the president or the composition of the Senate or the House, we’ll stick to our investment process, looking at the long-term prospects for portfolios.”
One of the few certainties to emerge from the election results is yet further reputational damage to the army of pollsters and pundits that once again failed to predict the apparent support for Trump. As Simon King, CIO of wealth management firm Vermeer Partners commented: “I won’t be investing in any political polling companies anytime soon.”
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