Managers prep for risks as presidential joust nears end

As Americans prepare to go to the polls to vote in the 2016 presidential election, money managers across the globe are readying their own portfolios for the outcome.

Some executives said they are still thinking about what they might do, largely because they are waiting for more details from the candidates on some issues. And while others have made changes that will benefit from or hedge against either a Hillary Clinton or Donald J. Trump presidency, they are changes that they would have made regardless of the Nov. 8 outcome.

“Normally U.S. elections don't matter — and it's fair to say generally in most places they don't matter,” said Rupert Watson, London-based head of asset allocation at Mercer Investments. “There tends to be a bit of volatility around the result, and then all goes back to normal.”

While sources generally agreed that a vote for Ms. Clinton would result in the status quo, with interest rates set to continue to rise from a 25-basis-point increase in December, managers and consultants largely are focusing on risks around Mr. Trump's election.

“With (Mr.) Trump it is very difficult to know. It is not just that he says some things that potentially could lead to some very bad outcomes, but also that he has no personal experience,” added Mr. Watson.

In general, managers are viewing a victory for Mr. Trump as risk-off for global financial markets. “I think there would be concern that he would pursue an approach to trade that is more protectionist ... and we could see a bit of a reversal in the trend of globalization that we have witnessed in past decades,” said Mark Dowding, partner and co-head of investment grade at BlueBay Asset Management LLP, London, which has $55.3 billion of assets under management. “That could impact economic growth, and lead to elevated risk premia.”

Sources said they are comforted by the fact that the U.S. system deploys more checks and balances than other countries, with Congress potentially able to ward off some unpalatable policies.

“You are likely to have a Congress split between the two parties, which is something that the financial markets typically like because there is compromise, more being done, and more reasonable things are done in terms of new laws and new acts being passed,” said Christophe Nagy, Paris-based head of U.S. equities at Comgest, which has €20.7 billion ($23.2 billion) of assets.

Regarding whether Mr. Trump would be good or bad, and the impact of many uncertain events, Mercer's Mr. Watson added: “I am reminded of the words of Dirty Harry in (the movie) “Magnum Force:” Man's got to know his limitations.”

But Daniel Morris, senior investment strategist at €530 billion BNP Paribas Investment Partners in London, said the key issue for financial markets is trade. “We know there are things (Mr. Trump) has said about trade that are pretty unambiguously bad for growth. And while Congress is responsible for passing legislation and the budget, there is more leeway for the president to make changes to trade agreements,” he said.

Some managers have been making changes to portfolios ahead of the elections not necessarily linked to the vote. Schroders' Johanna Kyrklund, global head of multiasset investments in London, said political events like the U.S. elections and Brexit are “chronic, not systemic events as such ... and occasionally flare up.” The firm manages £85.7 billion ($111.5 billion) in multiasset investments.

Executives “do not behave on speculation regarding politics, but we do (behave) dispassionately on probabilities. On individual events you need to manage risks throughout, but you don't want to position on them (so you are not then) on the back foot and unable to take advantage of opportunities,” she said.

The key is viewing these events as binary — even a small chance of something happening cannot be ignored. “That is something we learned from Brexit,” Ms. Kyrklund added.

Therefore, executives have taken positions in portfolios they would be happy to take but might also provide hedges or opportunities on the outcome of the elections. “We position on things going either way,” Ms. Kyrklund said. A win for Ms. Clinton means interest rates will probably move higher in December, hitting the bond market. “If (Mr.) Trump wins, we don't know what would happen, but the bond market could be concerned about a potential increase in the deficit. It might be enough to cause a jitter in the bond market, so we are lightening up (on) U.S. government bonds. That is something we would be happy to do anyway — in any case it is expensive, but there is the potential tail risk in the bond market if (Mr. Trump) wins.”

Things are more confusing regarding currencies, said Ms. Kyrklund. “We are not sure what it means for the dollar. But one thing we have done is take short positions in Asian currencies. We don't want to pull out of the yen and high-yielding return (currencies) because of the elections, but low-yielding Asian currencies are not as expensive to short and could be correlated with volatility,” she said.

Eric Stein, Boston-based co-director of global fixed income and portfolio manager at Eaton Vance Management, with $343 billion of assets under management, agreed that Asian currencies “could also potentially be vulnerable if (Mr.) Trump were to win and start ripping up trade agreements.”

And a win for Mr. Trump could also be more inflationary, he said. “We do have good-sized (Treasury inflation-protected securities) positions in our Short Duration Income fund. It is on for a number of reasons, but certainly that position could benefit from a (Mr.) Trump presidency though the position is not on for that specific reason,” he said.

The candidates' stances on health care and pharmaceuticals have also created opportunities. Comgest's Mr. Nagy said the firm has moved into specialist pharmaceuticals “more than we used to be, because some of the stocks have been hard hit because of what's been said by the candidates.”

Other managers are still in the thinking stage. Sources agreed that inflation is a consideration with both candidates, in part due to anticipated fiscal spending.

U.S. stocks could also suffer. “I think (Mr.) Trump poses a bigger threat to the overall construction of the world as we see it,” said Marino Valensise, London-based head of multi asset at Barings LLC, which has more than $275 billion in assets under management.. “We estimate that probably price-earnings ratios in the States incorporate a globalization premium,” and a victory for Mr. Trump could affect those ratios.

BlueBay's Mr. Dowding said executives are considering issues around the future leadership of the Federal Reserve and whether Janet Yellen would continue in her role under a Trump presidency. “We are also thinking about how to protect portfolios. It is different and trickier than Brexit — for me that was relatively straight forward as I believed it would be a local event, not global, and that policymakers would act to ease policy and mitigate adverse market reaction,” he said.

But in the case of the U.S. elections, the outcome is potentially more global. Plus, Mr. Dowding said, it's “not really that clear (as to) what can be done by monetary authorities, at least to deliver market support or stimulus.”