What do fund managers think about the US election?

Expect market volatility

Major political events are very often the trigger for market volatility. This is driven in part by the activity of traders, who make short-term, high-risk bets on the outcome of the result in the hope of making quick returns. But trading is very different to investing – which is why very few fund managers will be buying and selling in the small hours of Wednesday morning.

“In our investment process we don't factor in election day, anticipating the outcome or positioning based on an expectation of one specific outcome,” says Alessio de Longis, Senior Portfolio Manager at Invesco, co-manager of the St. James’s Place Multi Asset fund.

Fund managers approach the market with a different mindset to traders: they take time to research quality companies that they can invest in for several years. “Our investment process is really driven by the more long-term, enduring drivers of financial assets' performance, such as growth, monetary policy, fiscal policy, and so forth,” he explains.

Focusing on the short-term market volatility that is likely before and after the election result might trigger an emotional response that could interfere with your long-term investment strategy. “Politics can create short-term noise,” notes Johanna Kyrkland from Schroders, manager of the St. James’s Place Managed Growth fund. “If you can withstand the volatility, its best to sit on your hands and wait for it to pass,” she advises.

Focus on what will happen in the year after the election

Fund managers are focusing on how the outcome could affect the outlook for different sectors of the US economy in the next 12-18 months, when fiscal policy changes under the new administration are felt in the broader economy. They’re thinking about what kind of opportunities could open-up under a Biden or Trump administration, and how this would affect their investment strategies.

Over the past few weeks, the S&P 500 has rallied as prediction markets have forecast a Democratic sweep. This is a shift in positioning from a few months ago, when a Biden win was perceived to be negative for US equities.

"Concerns about a Biden administration raising corporate taxes and tightening regulation have been relegated for the time being,” says Chris Iggo from AXA, managers of the St. James’s Place Diversified Income fund. “After all, few think it would be wise to raise taxes soon after being elected, with unemployment at 8% and many businesses across the United States still struggling to fully re-open.”

If Biden wins, one of his top priorities would be passing a fiscal stimulus package to help the economy recover from the impact of coronavirus. Democrats are proposing a ‘green recovery’, which would have a knock-on effect on different parts of the US economy.

“The sector implications of a Democratic 'clean sweep' are meaningful considering the 180-degree change it would imply for environmental, health and regulatory policies,” notes David Riley from BlueBay Asset Management. “Fiscal spending policy changes such as meaningful infrastructure spending and higher minimum wages could benefit a major sector rotation in favour of materials and industrials,” adds Alessio de Longis.

That said, fund managers aren’t wedded to the idea of a ‘Blue Wave’.

A ‘status quo’ scenario, in which President Trump remains in office, and Congress is split between Democrats and Republicans, would mean investors “can expect a continuation of current trends, with one last leg in US outperformance in equities and fixed income," says de Longis.

Similarly, a Biden win with a split Congress would make it difficult for Democrats to pass legislation on corporate taxes and healthcare. A divided Congress “doesn’t change the political landscape that would affect businesses,” argues Jim Henderson from Aristotle Capital Management, managers of the St. James’s Place North American fund.

“A divided Congress will act as a significant barrier to the implementation of a Trump or Biden agenda,” confirms Riley.

Hope for the best, but prepare for the worst

The backdrop of this year’s election raises the possibility of a delayed or contested outcome. The coronavirus and a rise in postal voting are challenging the normal democratic process, and a winner may not be declared until several days after the election. While this outcome is the least desirable due to the uncertainty it will create, fund managers are preparing for it nevertheless.

“Even if the full count is delayed for several days, markets will only not know the outcome of the elections if the vote is very close and contested in one or more key states,” explains Riley. “If President Trump does not secure the electoral college votes of Florida, he has almost certainly lost, and similarly, if Biden does not win Pennsylvania it is difficult for him to see a path to the White House.”

Managers note that an uncertain outcome would create the kind of market volatility that even experienced traders might want to avoid.

"Should there be a contested result I wouldn’t be surprised to see a significant correction in risk assets and a rally in rates,” suggests AXA’s Chris Iggo.

“Perhaps the best approach for now is to just ‘standby’,” he recommends.

Investors who suffered the short-term fallout from past political events, such as Trump’s election in 2016 and the Brexit result, should remember those experiences, and heed this advice, in the weeks to come.

Invesco, Schroders, AXA, BlueBay and Aristotle are fund managers for St. James's Place. Where the views and opinions of our fund managers have been quoted these are not necessarily held by St. James's Place Wealth Management.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.