Across the region, the wealth management community has not been recommending substantial portfolio allocation changes before the outcome of the US presidential election on November 8.
“The US presidential election is definitely a topic people like to read about and have ideas about but we haven’t seen material shifts [of capital] into something else,” Adrian Zuercher, CIO, head of asset allocation for Asia-Pacific, UBS Wealth Management.
Adeline Tan, head of investment advisory for Mercer in Hong Kong, who advises on portfolio construction, added that the election has become more of a sideshow than an event requiring portfolio action. Tan works with institutional investors in Hong Kong, Taiwan, China and Korea who have global portfolios.
“Clients do have questions about what will happen if either candidate wins, but most are with multi-asset managers with no specific allocation to gold or other safe-havens. They are not in concentrated portfolios — not pure sovereigns, for example.”
In addition, Tan has had regular calls with the active managers clients are invested with to see how they are positioning. Some are making tweaks, but they are not going into pure safe-haven options, she said.
Mercer’s general advice has been to hold back on investing with fresh cash until the election is over. The change in US leadership has too many moving parts with outcomes that are impossible to predict in the short-term.
“Things can change even months after election. Especially for pension schemes which invest for the long-term.
“In terms of strategic asset allocation, we can only review that when we know who will be in office and the makeup of the Congress and the Senate,” Tan said.
Clinton victory
In shorthand, a Clinton victory means a continuation of the status quo, a Trump victory means strong volatility and risk off, something that has become conventional wisdom.
UBS WM’s base case is for a Clinton victory, which the firm also believes would be the best outcome for the market.
In the US, leading indicators on the macro side such as the PMI are picking up and third quarter earnings appear to be positive after five quarters of negative results, Zuercher said. “That will lead to higher equity markets.”
The bank has a moderate overweight in equities globally, including US and emerging markets. In Asia, risk is on for Asia ex-Japan equities. However, the firm is underweight Asian credit, which is expensive and risky compared to equities, he said.
“Our base case is positive for Asia. Asian credit won’t materially benefit from a Clinton victory but Asian equities will.”
Trump victory
Dire predictions about a Trump victory have been rolling out, most recently with President Barack Obama warning that the fate of the world is at stake. Similar warnings were heard about the Brexit vote, with the IMF, World Bank, EU and NATO joining in.
But a key restraint on Donald Trump in the White House would be the structure of the US government, which has checks and balances that prevent outlandish ideas (such as building a border wall) from going forward or getting funded, several portfolio managers pointed out to FSA. In addition, gridlock has been a standard feature in policy disagreements between the president and the House.
“The US has plenty of institutional checks and balances that creates a high degree of stability in the government,” Mikhail Zverev, head of global equities at Standard Life Investments, told FSA in an earlier interview.
“Even though big intentions and promises are made on the campaign trail, passing it through Congress is not easy and the Supreme Court may challenge it as well.”
Nonetheless, emerging market equities are at risk if Trump wins. Global markets will then be more challenging with higher volatility than a Clinton win, particularly in emerging markets and Asia, Zuercher said.
“If Trump wins, expect Asian equities to start to correct. We’ve built in a hedge with an underweight in the Asian credit space. Asian credit will suffer much more and will counterbalance the overweight in equities.”
Both candidates have said they find fault with the Trans Pacific Partnership, though Trump was strongly opposed to it. Moody’s has said that the TPP, which, among other things, provides more open access to the US market, stands to benefit Asian countries the most.
Trump has also railed against US trade with China, which he said favours China. Trade barriers could go up and impact global markets.
“There will likely be more trade restrictions, particularly with China,” Zuercher said. “Overall a more protective and nationalistic policy.
“The market would start to digest [a Trump win], then it depends on what the real policy is that’s implemented. The reaction starts to really matter when the new government starts to implement policies, which only happens 12 months later,” he added.
No matter who wins…
What is likely to happen regardless of the election result is infrastructure spending, sources said. Wealth managers expect a central bank shift from monetary to fiscal policies, in particular infrastructure spending, which can be positive for certain equity sectors such as industrial and building materials.
“Lately, we have seen a trend from various central banks discussing whether they should continue to use monetary policies only to stimulate their economies,” said Edmund Yun, head of investment solutions at CIC Banque Privee in Hong Kong.
“We might not be surprised to see more fiscal policies implemented in the US after the US election no matter who is elected.”
The past few months CIC has advised clients to go into absolute return fixed income or macro opportunity funds, though the recommendation has been based on other risks as well, such as an interest rate hike, Yun said.
“We believe these strategies will continue to work in the medium term.”
Perhaps the most important inevitable outcome is the unmistakable changing mindset to a more domestic focus, which is a theme running through Brexit as well, said Tan, from Mercer.
“The majority of people want the world to look less globalised in terms of trade agreements and mobility. That theme is more valid when we think about how want to allocate capital and what will earn money for us in the future.”
