With only hours left before the US election, investor commentary has been dominated by chatter over the potential outcomes. And it’s easy to see why. In the face of uncertainty over who the American people will choose to be their president, many investors will find themselves tempted to adjust their portfolios to capitalise on the possible outcomes. But strategising for a certain election outcome ultimately amounts to a roll of the dice.
By positioning a portfolio in a way that is particularly exposed to a Kamala Harris or Donald Trump victory, an investor operates on the assumption that their peers have mispriced the likelihood or impact of that election result. Although in some instances, that may be possible, these misjudgements seem unlikely in a presidential race that is very difficult to call.
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Banking on a certain winner is a gamble. Investors who design portfolios that can withstand a range of outcomes will be best placed to manage the political realities once the post-election dust settles.
Winners and losers
That being said, when looking at equities, the policies of the different presidential candidates suggest that different sectors could be set to benefit, depending on a Democratic or Republican victory.
One such sector is energy. Democrats have broadly supported renewable power, and the domestic production of the technology needed to generate it, with initiatives like the Inflation Reduction Act designed to turbocharge investment in this space. By extension, a win for Harris may boost US clean energy related-stocks and, in the fixed income arena, this could lead to more green bond issuances. Trump, however, has been clear on his intention to rein in government support for clean energy, so a potential second Trump presidency may have a negative impact on both green energy stocks and green bonds.
Healthcare has also been front and centre of the presidential election – and especially affordable healthcare. Value-based care models have benefited from Democratic policies in recent years, but a future Trump administration could role this support back, producing knock-on effects for healthcare and med-tech providers.
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By GlobalDataThe possibilities for the technology sector are also particularly far ranging – ranging as far as the moon, in fact. The Republican party backs an aggressive approach to placing the US at the forefront of space commercialisation, which could provide a boost to space tech equities. And back on earth, diverging stances on the need for a more regulated, or more market-driven, approach to the private sector may have implications for the big tech megacaps.
Effects on defence stocks may be less intuitive however. While a Democratic win could produce tighter gun control legislation, denting sales for firms in that space, Republican plans to reduce military aid to Ukraine could be more impactful for the sector – a cause that the US has spent $56 billion on since 2022.
Finally, Trump’s plans for tariffs have grabbed headlines throughout his presidential campaign, and if realised, could sway industrial stocks domestically and overseas. This includes boosting tariffs substantially for all US imports, and potentially up to 60% for imports from China – which could lift US industrial stocks, with potential negative effects for their Chinese counterparts. Alternatively, a win for Harris would likely see the continuation of present tariff structures.
A disciplined approach
So, what’s the best way to adjust your portfolio to prepare for these possibilities?
Diversified portfolios that have been built to withstand a variety of sector crosscurrents should prove resilient in the long-term across any of these eventualities. A disciplined investment approach does not need to be updated for an election year.
Even when the election result is known, investors should avoid trying to align their equity and fixed income investments with the policies of the eventual winner, as a new president does not equate to a certain pathway for the economy. Administrations are often overtaken by events derailing their pre-election pledges and if there is any gain available from aligning investments with the outcome, it will be consumed by traders that can react more quickly than investors at home.
History tells us that long-term market performance is largely unaffected by which political party is in power, but media sensationalism during election season paired with market turbulence as traders respond to the outcome of voting can influence investors into making mistakes.
Rather than successfully predicting the impact of a particular candidates policies, it is the valuation of an asset that is likely to be a far more reliable guide to future returns over next decade. Over-priced assets with political tailwinds are likely to deliver lower returns than those with the opposite characteristics.
In the meantime, the resolution of the election may very well produce a period of significant volatility, but it is vital investors are prepared for this short-term discomfort in markets and do not succumb to the instinctive fight, flight or freeze response that can accompany sharp movements in asset prices.
Investors must remember that investing is an optimistic pursuit. To invest for your future, you must first believe that the future will be similar to the present, rather than worse. Film director Christopher Nolan said that “dystopias sell twice as well as utopias”. Investors would be wise to remember this before absorbing election season discourses into their investment strategy.
Dan Kemp is the Chief Research & Investment Officer at Morningstar
