The 2016 U.S. election campaign has been gruelling, shocking and polarizing. But it will soon end, and investors should remember that fact when reviewing their portfolios.
“You should not [be] invest[ing] for the next six weeks; you should be investing for the next six to 20 years from now,” says Stephen Carlin, head of equities and managing director at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund. “Elections come and go fairly quickly. It’s the profit cycle that has historically been the more important determinant of stock market returns.”
Nonetheless, certain sectors will likely decline or rise after November 8.
- Crossing the border could be harder under Trump
- Loonie expected to decline on U.S. election, no matter the winner
Election-sensitive or election-proof?
If Democratic candidate Hillary Clinton wins, healthcare stocks would likely decline, says Carlin. “Clinton has talked a fair bit about drug pricing,” he says. “I would argue the healthcare sector would have some risks, and has already begun to reflect that in a number of equities.”
He also points out Clinton would continue President Obama’s crackdown on tax inversions: inversions occur are when a company moves its headquarters to a lower-tax jurisdiction, often while still operating in the higher-tax jurisdiction.
“We’ve seen a number of transactions in Canada whereby that has been utilized,” Carlin says. “Tim Hortons is one example. Valeant is probably the best example, where it was viewed that Valeant had a tax advantage and were structuring their acquisitions via that conduit. Clinton has talked about closing that loophole, and I see that as being somewhat of a negative for companies that have utilized that strategy in the past.”
And, while the expected Clinton victory would be neutral to positive for the energy sector, Carlin cautions that “neither candidate has been sufficiently supportive of pipelines. Therefore, that would create a longer-term issue for Canada’s desire to be able to export a higher level of oil or natural gas through the U.S.”
There are other areas where the opponents are, if not on the same page, at least reading from the same book.
“Both candidates have talked about shifting their focus more toward fiscal policy […and] substantially increasing their infrastructure spending,” Carlin says. “So, companies in the engineering and construction sector would stand to benefit from both candidates. But [Republican candidate] Donald Trump has said he would spend at least double the amount Hillary Clinton is proposing, and [that he] would make the military ‘so big, powerful and strong that no one will mess with us.’ ”
So, in the increasingly unlikely chance that Trump becomes president, Carlin says companies with exposure to military spend in Canada could do well. Carlin mentions CAE Inc., a Montreal-based aerospace company, as an example.
As for election-proof stocks, investors can look to the financials sector. “Notably, a couple of the banks do have exposure within the U.S., but the majority of their business remains in Canada, and [due to] the diversified nature of their business, we see very little risk,” Carlin explains. “Similarly, the domestic-oriented companies in the consumer sector – telecom, utilities – would also be somewhat protected […] from either outcome within the U.S. election.”
How to shield portfolios
If the race becomes tighter and volatility rises, higher-beta stocks will likely underperform, says Carlin. “You would want to shift over to more defensive sectors — telecom, staples, [for] example.” He cautions that “healthcare often falls into that category as well, but […] I’m not sure healthcare would provide investors with the same type of […] safe-haven aspect, given what the candidates have been talking about in that category.”
For anyone concerned about how their portfolios will fare post-election, it’s a good time to purchase put options. “If markets go down, your put options would go up in value,” says Carlin. “It might be a small cost to investors, but it’s the cost of insurance. And […] because volatility is so low, [right now, insurance] is actually quite cheap.”