J.P. MorganSummary List Placement
JPMorgan's asset management division is advising clients to not put too much energy into trying to predict the election results and spend more time understanding the market implications of various outcomes.
At a US election media roundtable, JPMorgan's EMEA chief market strategist, Karen Ward, and global market strategist, Hugh Gimber, outline how they are advising clients to position their portfolios, with less than two weeks to go to the election on November 3.
"I think we have several recent events that are a timely reminder of why going into any one of these types of political events with too high a conviction on a single outcome is a fairly risky strategy," Gimber said.
Clients should be thinking about the election as four potential scenarios rather than two, Gimber said, with the potential of either a Democratic sweep, a Republican sweep or some form of divided government.
"That's been the key focus, not just thinking about Democrats versus Republicans, but also thinking about how congressional leadership would impact the likelihood of some of these policies being implemented," Gimber said.Democratic Sweep
With a Democratic sweep, Gimber is expecting upward pressure on US Treasury yields and also a steepening of the yield curve. This would have implications for both equity and fixed-income investors. The impact of rising bond yields could provide support for sectors that have been "less loved" this year, such as the financial services industry, Gimber said.Republican Sweep
A Republican sweep could bring much of the same, with a continued focus on the US economy. However, how much the Republican party can achieve will be dependent on whether they can retain control of the Senate and win back the House of Representatives, Gimber said.
"On foreign policy, I think there would be a greater level of uncertainty here, it would really be a continuation of what we've seen over much of the past couple of years, where there would be some challenges, I think, for investors to accurately predict the path of foreign policy ahead," Gimber said.Contested Election
JPMorgan is not ruling out the possibility of a contested election. Gimber believes the results from Florida, a state which can count mail-in ballots early, will inform how clean cut this election will be.
"So if you get a clear, decisive victory in Florida for the Democrats, then that could come through on election night, and that we think would make the path to the White House for the Republicans much more difficult, much more complex," Gimber said. And if you don't get a clear cut result from Florida on election night, and I think it might take a little bit longer for that result to come through."Five Key Messages For Clients1) Stop trying to predict the outcome, focus long-term
Both Gimber and Ward are urging clients to think about the policy implications in the long-term, rather than try to predict what the market will do on election day.
"So balance across sectors, just so you've got some time in your portfolio to understand and digest the implications, I think is one of the key things we would say, in order to to sort of see through that period of volatility," Ward said. "Because of course, we're long term investors, so we want to just make sure we are making the most of opportunities, and I think balance is the best way to do that."2) The pandemic has changed the market focus, near-term stimulus is a pressing concern
Markets are focused on how either a Democratic or a Republican sweep would be the best case scenario for getting another fiscal stimulus package.
"Now the focus is absolutely on a decisive victory from this election, and how that can unlock near term fiscal stimulus that is where the market is most focused at the moment," Gimber said.3) Policy proposals will impact specific sectors
Both Democrats and Republicans policy proposals will have an impact on specific sectors. Gimber highlighted three sectors that investors should be paying attention to.
Both parties are moving toward a tougher regulatory environment for technology companies, Gimber said. There is less difference between a Democrat or a Republican administration on regulation than many investors currently think, Gimber said.
"And so for tech stocks to maintain the market leadership that they've demonstrated this year, they're going to need to demonstrate that they can deliver outsized earnings in a more stringent regulatory environment, regardless of who's controlling the White House in the years to come, " Gimber said.
Healthcare stocks have come under pressure as the election campaign has taken hold, Gimber said, which has resulted in healthcare stocks trading close to the largest discount they've seen relative to the broader market over the last 25 years or so.
"[Biden's] proposals we think would be much less disruptive for the healthcare sector than perhaps the market currently fears," Gimber said. "And so once clarity comes through on election day, we think that we could be looking at a similar picture for the healthcare sector as some of the examples that we've seen under the previous election cycles."
The election result could have very strong implications for Europe, Ward said. If a Democratic sweep were to take place and it resulted in the massive infrastructure investment, as suggested by Democrats, then this could result in positive results for energy and materials.
"So the reason the reason the US has done so well is because it's so heavily tech-dominated," Ward said. "And the reason that Europe has struggled is because it has a much higher weighting towards financials and energy and materials."
The UK, in particular, has been one of the biggest underperformers this year because of the large weight to energy, materials and financials in the FTSE 100, Ward said.
"The UK could be a major beneficiary, all else equal," Ward said. "Of course, as Hugh says, the problem is, as always, all else isn't necessarily equal, it could be a real tailwind for that region on a specific outcome."4) US/China tensions will persist
Both parties have been presenting an "America first" agenda, Gimber said. But each side will approach it from different angles.
"We think that approach would be more predictable for the market under a Democrat leadership, and could help to remove some of the risk premium, which is currently embedded in emerging-market assets today," Gimber said.
Whereas Ward warns that investors must separate talk from expected action on China.
"I feel like we've been here before, we've seen through the course of last year that, whilst it may be a strong domestic political narrative to be tough on China, it's actually very hard to do in practice, it actually ends up hurting the US economy itself," Ward said.5) A contested election would be a worst-case scenario for risk assets
JPMorgan is preparing clients for the worst-case scenario, but is hoping for a much clearer cut outcome after November 3.
"I think the bottom line for markets is that the worst outcome would be a delayed, or contested, election, given what that would mean for really policy paralysis in Washington," Gimber said. "And so I think that's the one scenario that all investors agree, we would most like to avoid."
Gimber is encouraging clients to do their homework and think about the next steps in the scenario of a contested election. He highlights that December 8 would be a key date in this scenario, as states should have worked through legal protocols to determine the election outcome in their respective areas.Don't lose sight of the broader picture….
However, Gimber continues to remind investors the election will not be the only factor driving the market.
"Looking underneath the surface, you can see that in years, such as 2000, or in 2008, we had very strong market moves," Gimber said. "But those were not necessarily tied to the election, you also had the start of the tech bubble bursting in 2000. Obviously, you had the financial crisis in 2008. So investors are absolutely right to be doing their homework at this stage to be thinking through the different policy implications, but also mustn't lose sight of the broader picture."
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