With less than a week to go until the U.S. presidential election, Europe-based money managers and market watchers are keeping a close eye on the potential implications for markets.
According to fund flow and asset allocation data tracking firm EPFR, global investors spent the third week of October “strategically adjusting their portfolios to prepare for potential market shifts,” the firm said in an emailed update. Fund flows “reflected a mix of risk management and tactical positioning,” amid high uncertainty over the outcome of the election and in anticipation of scenarios including the “Trump trade” resurgence — where certain sectors gain in anticipation of his presidency, a continuation of the Biden/Harris policy agenda, or a contested result.
Canada equity strategies recorded their third-largest inflow of the year, which EPFR said was likely linked to a perception of stability; while demand for traditional safe-haven assets was reflected in the highest level of inflows to physical gold funds since late in the first quarter of 2022. The desire for liquidity and stability was also reflected in fresh capital continuing to flow into U.S. money market strategies.
EPFR-tracked data showed both equity and bond funds had recorded steady positive flows year-to-date — unlike in previous U.S. election years, the firm said. The biggest contributor to gains were U.S. equity strategies, which EPFR said posted their third straight inflow and fifth over the past six weeks. Derivatives strategies saw the largest inflow on record, which EPFR said signaled “increased interest in hedging and speculative positions ahead of the election.”
Overall, the message is to remain calm ahead of the election and beyond. “The final quarter of 2024 will likely be beset by U.S. election volatility,” said Seema Shah, chief global strategist at Principal Asset Management, in an emailed comment. “Investors will need to keep cool heads, focus on the fundamentals, and resist the temptation to revert to cash,” she said, adding that the attractiveness of cash has declined amid the Fed’s monetary easing cycle and the fact that further rate cuts have potentially been front-loaded.
And the firm’s message for bond investors is that the asset class is set to outperform — despite that expected volatility — with municipal bonds, high yield and other sectors expected to continue to do well.
"Today’s spreads are fairly tight compared to historical averages, and potential catalysts such as geopolitical and election risk remain on the horizon,” said Michael Goosay, CIO, fixed income, also at Principal. “With corporate profit margins healthy, cost-cutting and layoffs are unlikely, meaning that the greatest risk to spreads (recession-related economic challenges) is unlikely,” he said.
Technical pressures are likely to ease following the U.S. election, perhaps making the fourth quarter of the year “the right entry point for investors” to munis, Goosay added.
Both Donald Trump and Kamala Harris are expected to increase deficits and overall U.S. debt levels, said Gordon Shannon, partner and portfolio manager at TwentyFour Asset Management, in a commentary.
It is worth noting that while neither candidate is going to improve U.S. indebtedness, we don’t see fiscal expansion sparking a “bond vigilantes” moment for (U.S. Treasuries). To those who worry that the upward trend in the U.S. twin deficits (current accounts and fiscal deficits) is unsustainable, we would point out this has been the case for many years,” Shannon said.
Morningstar, meanwhile, warned that in the case of a Trump victory, Europe could find itself “in the crosshairs” of a trade-war that has so far been focused on China.
Trump’s idea of a blanket 10% tariff on all goods imported into the U.S. would affect the region.
“Europe is a key trading partner of the U.S., yet the consistent trade deficit (between the two markets), which peaked at over $218 billion in 2021, often goes unnoticed,” said Michael Field, European equity strategist. “Trump has not been shy to vocalize his views that countries with a trade surplus with the U.S. might be engaging in unfair trading practices. This raises concerns for global equities if tariffs are ramped up if he wins the upcoming election," Field said.
