UBS: US election - Not a done deal!

First, the recent vote by the UK to leave the EU is a stark reminder that outcomes of popular votes can be difficult to forecast. Second, there have been large swings in US election campaigns in the past. For example, in 1988 Michael Dukakis lost by seven percentage points to George W. Bush Sr. Two months before, the Democrat had led by the same margin. And third, this US election represents the first one in which both main candidates’ disapproval ratings are higher than their approval ratings. In our view, the disaffection with the two major parties’ nominees makes the outcome far less predictable than usual. Investors would do well to prepare for alternative outcomes. We’ve identified investment ideas that can shine under a Clinton presidency, others that may benefit from a Trump presidency, and a final group expected to perform well regardless of who wins the White House.

• Investment ideas for a Clinton presidency and split congress: This scenario is CIO’s base case. In general, the environment should remain supportive for US equities and investment grade bonds. We would expect a modestly positive market reaction as economic policy uncertainty fades, and markets rule out more extreme scenarios. This outcome would also support our long-term Energy Efficiency investment theme. Clinton is a declared supporter of renewables and CO2-reducing technologies in general.
• Investment ideas for a Trump presidency and Republican congress: We regard this scenario as a less likely risk case. At first, the effect of a Trump victory would probably resemble that of the UK“leave” vote: gold would likely rise, and capital could flow out of the US dollar and into the Swiss franc. At the same time, fear of increased protectionism could hurt equity markets or sectors with high sales exposure to the US like the Eurozone consumer discretionary sector.
• Investment ideas for either scenario: In our view, investors can weather the US election by holding more European dividend stocks (EMU, UK, and Switzerland), focusing on a combination of dividend quality and sustainability. And our Security and Safety investment theme seems well-positioned to benefit from both candidates’ promise to increase security spending. On the other hand, lackluster economic growth in Mexico is likely to weigh on Mexican equities and the peso. Tepid activity should persist under Clinton, and would only be exacerbated in the case of a Trump victory, as uncertainty rises about punchier protectionism.

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