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The upcoming US election may prove to be one of the most consequential the markets have seen in decades. It is also unusually unpredictable. At this juncture, both candidates seem to have an equal chance of winning but there is a real potential for surprise events that could decisively change the fortunes of both parties.
A Trump presidency — particularly if Republicans also gained control of Congress — would imply more of a structural shift on trade and fiscal policy, with rate markets likely to be more directly impacted than any other major asset class. Due to the late-stage change in the Democratic ticket, we have less clarity on specific aspects of Kamala Harris’s policy agenda. In broad terms, we expect continuity with President Biden's agenda. However, where Harris veers to the left of Biden — for example, on proposals such as "price gouging" by food companies — detail is sparse.
For investors, the election’s most relevant implications are those related to trade and foreign policy, fiscal shifts and monetary policy, which are likely to affect inflation, rate expectations and the US dollar.
While there is a lot of uncertainty, and significant differences between the actual policies each candidate could put in place, we shouldn’t miss what is common: regardless of who wins, both candidates advocate domestic and international measures (from corporate subsidies to taxes to immigration) that challenge the status quo.
This is a challenging scenario for portfolio positioning. At the risk of oversimplification, there are two key facts that seem to characterise the election. First, this is an election that will bring material change — even with a Harris win — but the actual impact on markets is as yet hard to gauge. Second, the election is now essentially a toss-up, with a handful of swing states likely to drive the outcome.
These observations do help us, even if they appear at first to do the opposite. Regardless of the actual direction, we know change is volatile. What this suggests is that investors should position accordingly, both to take advantage of opportunities and protect on the downside.
Taking a multi-asset perspective, the challenge is that the election results are likely to have a substantial impact on inflation and growth — the two key economic indicators markets are watching right now — and, in turn, on the Fed rate-cutting path, which has been, and in our view will continue to be, the most important driver of multi-asset returns over the next 12 months. Unfortunately, the two candidates are likely to have very opposite impacts on growth and inflation, making positioning from a macro perspective difficult. As such, relying on dynamics at the asset class level may be the best way forward. Delving deeper into the asset class level, I think it is important to revisit positioning and allow the necessary flexibility to manage risks, while at the same time being ready to take advantage of opportunities that emerge: a truly difficult balancing act. With that in mind, I asked three of our portfolio managers, across both fixed income and equities, to share how they are approaching this highly uncertain period.
Although I think the election is too close to call at this stage, the outcome I am most focused on — because it would have the most significant impact on market pricing — is the potential for a Trump victory with a “red sweep” — meaning the Republicans would control both the House of Representatives and the Senate.
I am taking Trump seriously when he says that on his first day as president, he would enact tariffs and immigration restrictions. In my view, these are both inflationary in the long term. I also believe that Trump would not exercise fiscal prudence and that he may even potentially try to cut taxes. I think this combination of policies would be negative for longer-maturity treasuries. All else equal, I believe this is positive for credit markets but with spreads historically tight and unattractive, I focus on the cheaper three-to-five-year maturity securities.
On the other hand, I think a Harris win would ensure greater continuity and therefore reduce the risk of mispricing.
Nevertheless, I think valuations appear stretched overall and I think the risk of volatility is increasing with this election amid signs of slowing US inflation and unemployment climbing faster than the Federal Reserve expected. Currently overweight in US treasuries, we are positioned to take advantage of volatility and shift decisively back into credit should valuations change significantly. 1
As we approach the US election, I anticipate increased market volatility, which often creates opportunities. Rather than positioning for a specific candidate, I’m focused on capitalizing on market dislocations. Historically, risk assets tend to decline before elections due to an outsized risk premium, potentially leading to favorable buying opportunities in higher-yielding credit sectors.
For example, if markets expect a Trump victory, Treasury yields could potentially rise due to anticipated restrictive immigration policies and tariffs. On the other hand, if Harris gains momentum, rates might fall and spreads could widen as markets brace for slower economic growth and higher taxes.
Markets often overreact to potential election outcomes, creating opportunities for active duration management and sector rotation. We’re maintaining ample liquidity in portfolios and working closely with our specialists to quickly identify and act on these opportunities. We’ve navigated similar preelection periods, and I’m confident we’ll find opportunities with attractive potential as the market reacts.
A Trump presidency is expected to be positive for both US and non-US equities, but immigration restrictions and tariffs could stoke inflationary pressures. Areas of focus under a Harris administration would be higher corporate taxes, increased subsidies of domestic production, and greater regulation of health care and drug pricing.
Given the risk of excess market volatility and the closeness of this presidential race, I believe it is more important than ever to focus on attractively valued stocks that offer a combination of growth, quality, and capital returns. I am not explicitly positioning the portfolio for a specific election outcome but see opportunities within volatility. Conversely, I think that now is the time to filter portfolios for companies with less favorable risk/reward profiles, where valuations and growth rates may prove more sensitive to changes in consumer confidence and interest rates. Reviewing such companies at this point may enable investors to realign portfolios before election volatility takes hold.
1The above is not intended to constitute investment advice or an offer or solicitation to buy or sell securities. Investors should consider the risks that may impact their capital, before investing.
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