Michael Greenberg, portfolio manager for Franklin Templeton Solutions, isn’t planning any major portfolio moves before the election on November 8.
He’s more defensive in his portfolio and is holding more cash, and says he’ll be evaluating how markets react to U.S. election results. As of October 14, polling averages showed Hillary Clinton with an 85.5% chance of winning the election, and markets have banked on this probability.
“We’re a little bit underinvested in some asset classes and holding gold to protect against tail risk,” says Greenberg. “We’re going to monitor whether markets take the election results badly and whether currencies go down or we see signs of trade wars,” he adds. Closer to election day, expect one candidate’s policies to start getting discounted as one candidate’s victory becomes more likely.
“It’s important to know who’s leading [the polls] and what their general strategy is. [Markets] will discount the different asset classes that they expect might be affected,” he says.
Since it’s the eighth year of a presidential term, says Greenberg, pay attention to whether markets react strongly to the election result, since the winner is bound to be someone new. This is one reason to take a more defensive approach, he adds, saying, “We would prefer to be on the sidelines; to just to wait and see how things play out. Our view is that we will potentially see a little bit more volatility.”
And current valuations, especially in the U.S., suggest stocks and bonds are reasonably valued, he adds. “If you look at equity markets and credit markets—and even government bonds—our view is that things are well-priced. You’ve got price-to-earnings ratios that aren’t cheap. And you’ve got credit spreads, which is the cost of corporate debt, that are fairly low.”
In the weeks following the election, Greenberg will decide whether he wants to maintain a more conservative portfolio or add risk. In the equity space, he notes, “We’re actually preferring emerging markets; not that they’re insulated from all of this, but they’re a little bit less tied to what’s going on in the developed markets.”
After the election
Since Clinton is leading in the polls, expect more surprises and volatility if Donald Trump defies the odds for a White House victory.
One area that’s concerning market strategists is Trump’s position on trade. “He’s clearly quite opposed to NAFTA and the TPP, and he’s not afraid call out China as a currency manipulator,” says Greenberg. “Also, he’s potentially looking to increase tariffs on imports and go down that trade war route.”
Greenberg adds that this policy approach could be a risk for exporters, even though Trump says it would be good for labour markets and manufacturers.
Meanwhile, says Greenberg, “Clinton says she opposes NAFTA, but she’s [mainly] picking up on a few of the environmental components. I don’t think we would expect as strong of a rebuke against NAFTA as you would see with Trump.”
On the upside, adds Greenberg, Trump’s proposed corporate tax breaks “could see some parts of the market do quite while in expectation of more discretionary spending.”
Gary Hufbauer, part of the senior research team at the Peterson Institute for International Economics, suggests a surprise Trump victory could be a tipping point for a financial crisis. That’s because Trump could far more easily restrict trade than he could liberalize it, but he may struggle to get corporate tax measures through Congress.
“Trump is all over with his economic policy, but he’s very clear on one thing: he’s a protectionist,” says Hufbauer. “And this is such a headline issue in his campaign, that I do think he would implement some things right away,” such as declaring China a currency manipulator and making changes to trade agreements.
Further, it’s likely that Trump’s tax relief for corporations would be stalled by Democrats in Congress. That could lead to “the cataclysm of his international trade policies very early, [whereas] you wouldn’t get relief from his tax policies until much later, and that creates a gap,” says Hufbauer.
Energy is another area with major policy gaps between the candidates, which means stocks would be affected very differently depending on the election’s outcome.
“With Clinton, [you’re] quite a bit more positive on alternative energy [and] solar, whereas Trump really believes in making America an energy superpower again. So you would potentially see the [energy] sector do quite well under Trump as well,” Greenberg says.
Finally, there’s Trump’s view towards the U.S. Federal Reserve and how independent it should be, says Greenberg. “He believes that U.S. Congress should have a bit more of a say when it comes to the Fed and its decisions. But some believe that having a more independent Fed is better,” given setting interest rates and monetary policy has repercussions on America’s cost to borrow.
It’s a major consideration for markets, he adds, since “under either candidate’s plan, there’s quite an infrastructure spend planned and that’s got to be financed. If the cost of financing goes up, that’s not necessarily a good thing for the economy.”
No relief rally?
If Clinton wins, there’s another thing to watch, Hufbauer notes. “Markets already assume she’s going to be elected. Still, the relief rally may not be as strong as it has been in the past after elections.”
This is because the size of this election’s relief rally depends on what happens in congressional elections, also on November 8, and how much control Democrats can take. If Clinton gets a majority of Democrats or a close balance, “markets may get worried,” Hufbauer says, noting that Clinton’s views on tax cuts for the wealthy and overseas investment aren’t favoured by investors.
“I expect Republicans [will] keep a stronghold. That’s what [would] propel the relief rally because then we’ll get more of what we have now, which is gridlock on tax issues,” says Hufbauer.
Greenberg suggests that if there is a big market sell-off or rally on the back of the election, it could be an opportunity. In the event of a sell-off, “investors could then access the market at a cheaper price than today, especially if we start pricing in a really bad [economic] scenario.”
It’s important to think of the U.S. election of just one risk among many, he adds. “When looking at the market overall, remember that the U.S. election isn’t the only risk. There are also some important elections and referendums happening elsewhere, such as in Italy in December, and you have Brexit. So while the U.S. election is a big risk, there are other events.”