Dispassionate investing vital in a noisy US election cycle
The bottom line for investors is this – trade the broader economy, but hedge the political unknowns.
“THERE are weeks where decades happen.” This quote aptly sums up a summer to remember for US politics.
Former United States president Donald Trump survived an assassination attempt, and President Joe Biden formally bowed out of the election race. Vice-President Kamala Harris clinched the Democratic presidential nomination and is enjoying a super-charged wave of popularity and donations.
Polls now signal a neck-and-neck race, with some battleground states showing a statistical dead heat. With under three months left, the election remains too close to call.
Our policy experts put the probability of a Trump win and Republican Congress at 35 per cent, and a Harris-led split Congress at 40 per cent.
Meanwhile, after rallying all year, financial markets sold off on concerns over the US economy and tech earnings, though they have since regained most ground. With uncertainty thickening as November nears, the bottom-line for investors remains – trade the broader economy, but hedge the political unknowns.
Watch the economy and earnings
Politics may dominate headlines, but deeper factors beyond Washington underpinned the earlier global equity selloff.
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Several data releases pointed to a US economy weakening at a faster-than-comfortable pace. The Federal Reserve has explicitly opened the door to imminent rate cuts, and second-quarter tech results are sparked fears of difficulties monetising artificial intelligence (AI).
At one point, these factors drove the S&P 500 and Nasdaq 100’s reset – they were down 8.5 per cent and 13.5 per cent, respectively, from their peaks, leaving tech-heavy Taiwan and South Korea among the worst regional performers.
While option market skews still point to choppy markets near term, we see corrections as tactical opportunities to be bought rather than a sustained unwinding to sell.
The backdrop remains conducive: The US economy appears headed for a soft landing not a recession, private balance sheets are solid, and the unemployment rate – at 4.3 per cent – remains low by historical standards.
The Fed can quickly cut rates since inflation is approaching its 2 per cent target. The core personal consumption expenditures price index was 2.6 per cent in June. We now expect the fed funds rate to decline 100 basis points by year’s end, up from 50 basis points.
Additionally, while tech’s pullback has recovered by about two-thirds, we still see a gradual opportunity to add AI exposure in semiconductor leaders and vertically integrated mega caps both within and outside the US.
Meanwhile, quality bonds should deliver further capital appreciation as rates fall – and help cushion portfolios against potential growth missteps.
We like investment-grade (IG) bonds and the five-year segment duration-wise, to minimise risk from swings in the long end of the curve. In Asia, we like bank tier-2 bonds, Indonesia and South Korea IG bonds. We are selective in high-yield, preferring Macau gaming and India.
Given elevated uncertainty, alternatives are a strategic source of diversification and risk-adjusted returns for investors who can tolerate illiquidity. Hedge funds can potentially stabilise portfolios during times of stress and capitalise on market dislocations to generate returns when other asset classes struggle.
Other elements of a well-diversified, all-weather portfolio include exposure to structured investments with capital preservation or yield generation features. Gold also remains an effective hedge – we see it rising to US$2,700 per ounce by mid-2025.
Harris 1.0 vs Trump 2.0
As November nears, election-led volatility should surge, given both candidates’ divergent policy agendas. The impact will likely be felt most at the sector level.
A Trump administration – especially with a Republican Congress – would likely usher in higher tariffs, lower taxes, and lighter-touch regulation.
Among US stocks, financials and traditional energy would clearly benefit. Higher tariffs would impede companies with supply chains abroad, notably those exposed to China in the consumer discretionary, industrial, and tech sectors.
US domestic producers in steel, lumber, aluminium and solar cells could benefit.
Meanwhile, a Harris win would largely represent Biden’s status quo with little deviation. This would include a focus on climate change, regulatory scrutiny on big businesses and pressuring China over trade.
Her administration would be likely to see a split Congress, though, possibly compelling Harris to turn to executive actions and regulatory oversight for issues such as climate change.
In such a scenario, we still expect supportive initiatives boosting the green energy, materials, industrial and electric vehicle sectors in the US.
Bear in a China shop?
Finally, a Trump 2.0 return would have outsized implications for Asia, particularly China. His proposed 60 per cent tariffs on China and 10 per cent universally would push the effective US tariff rate back to levels last seen during the Great Depression, potentially annihilating US demand for Chinese goods.
Even assuming no tit-for-tat, these shocks could easily result in a drag of at least 2 percentage points on Chinese and Asian growth in year one and weaken the Chinese yuan to 8 versus the US dollar.
That said, such tariffs would be hard to implement given the potential blowback on US consumers and businesses. Tariffs are more likely to be targeted and similar in scale to Trump 1.0, when average duties on China rose from around 3 per cent to 19 per cent.
Such a scenario would still knock a painful 70 basis points off Chinese growth annually over the next two to three years. This drag would also be keenly felt in smaller, open north and south-east Asian economies.
Longer term, though, South Asian markets with supply chains positioned to fill the gap should benefit. The macro tailwinds of AI investments and rate cuts should also cushion the immediate sticker shock of a Trump victory.
Whatever political twisters lie ahead, a dispassionate focus on fundamentals and diversification remain key to longer-term investing success. For investors, position for the broader economy but be prepared for election risks.
The writer is Apac head, chief investment office, UBS Global Wealth Management
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