Narrowing polls force hasty recalibration

As retreat from risk gathers pace, funds eye opportunities from a possible election upset

The most famous example of a shock US election result remains Harry S Truman’s 1948 win over Thomas Dewey, memorialised in a photo of Mr Truman holding a newspaper whose headline erroneously gave the victory to his opponent.

As the 11th hour approaches in this year’s fight, a narrowing of the polls has shaken investors’ confidence in a Hillary Clinton victory and forced them to contemplate the immediate fallout should Donald Trump’s divisive campaign take him to the White House.

With memories of the UK’s shock vote to leave the EU still fresh, investors are not sleepwalking into polling day. Instead they are heading for the exit with increasing momentum.

The S&P 500 is on its longest losing streak since the financial crisis, down for eight straight days. Gold, the quintessential haven asset, is back above $1,300 a troy ounce, while the equity market’s fear gauge – measured by the implied volatility of S&P 500 options – has burst above its long-term average of 20 in a move that has historically signalled an approaching storm.

Meanwhile in corporate debt the riskiest high-yield bond funds recorded the biggest withdrawal of the year in the week to Wednesday.

“Investors know that regardless of their personal feelings, Clinton is a known quantity. Trump simply is not,’’ says Marc Chandler, a strategist at Brown Brothers Harriman in New York.

Should Mr Trump win, the retreat from risk is likely to accelerate in the near term.  The Republican candidate’s campaign has been marked by controversial comments on issues of central importance to any investor: dollar policy, the international trade system and the sanctity of US government debt.    Unknown quantity   Barclays analysts estimate that the US stock market could plunge as much as 13 per cent if Mr Trump were to win. Given that the property mogul is an unknown quantity in policy terms and governing style, it is little wonder that investors are recalibrating.

“This is a market that had been very comfortable with the projected outcome, and now the projected outcome is at risk,” says Alan Gayle at RidgeWorth Investment.

Riskier assets may also not escape unscathed from a close result – one in which a candidate wins the popular poll but loses out in electoral college votes, or that leads to a contested election. Havens such as gold, the Japanese yen and Swiss franc will be in demand.

By contrast, analysts at Barclays forecast a 2 to 3 per cent bounce in the S&P 500 if Mrs Clinton extends the Democrats’ hold on the White House. Indeed the size of any “Hillary pop” is growing given the sell-off in the past week, according to Julian Howard at GAM.

Equities
Some parts of the stock market could do less well under Mrs Clinton, some investors say. VogelHood, an alternative data company that turns federal regulatory and lobbying information into signals for money managers, is advising hedge fund clients that biotechnology, pharmaceuticals, oil, gas and banking stocks will probably come under “significant regulatory pressure” in the first 100 days.

Some money managers are already getting out, or at least taking money off the table. The healthcare and biotech indices have fallen 8.5 per cent and 11 per cent respectively since the start of October.

Of course a post-Trump plunge would deliver opportunities for active fund managers who, in general, have failed to outperform their benchmarks this year. Any selling across equities and corporate debt might allow them to end 2016 in a brighter mood.    Treasuries   While equities have fallen, US government debt has fared better, with benchmark yields dropping. Broad volatility after a Trump victory Trump could dissuade the Federal Reserve from raising rates next month.

However, whether Treasuries would provide shelter is debatable. The outlook for the $13tn market is less clear given Mr Trump’s talk of defaulting and ambition to loosen the fiscal spigots. This would be likely to lift bond supply and fuel inflation, sending yields higher.

“I don’t know that Treasuries are going to be the safe haven asset in the event of a Trump victory,” says Russ Koesterich at BlackRock.

Mr Howard shares that view but is reluctant to pay for expensive hedges given that stocks bounced back sharply following the scare over the Chinese economy at the start of the year and after the shock subsided of the UK Brexit vote. “The lesson is that markets did recover,” he says.   Gold    The precious metal has been a  beneficiary of the tightening polls, and that would be likely to continue if Trump prevails. Gold has gained 4.2 per cent since mid-October, while a gold mining ETF has rallied more than 12 per cent from its lows of last month.

A Trump win would propel gold 5 per cent to 7 per cent higher in a “knee-jerk reaction”, say analysts at Citigroup. Their base case – Mrs Clinton wins, the Republicans keep control of the House of Representatives and Democrats gain a Senate majority – would send the metal down 5 per cent       Currencies   lnvestors are also confident over how the Mexican peso will behave after the result. Given its
sensitivity to polls, traders have concluded that what is good for Mr Trump is bad for the peso.

The peso lost 3 per cent of its value when Mr Trump – whose hostility to free trade would hurt the US’s southern neighbour – was performing well in September, and it recovered in his difficult October. It has been on the backfoot for the past week.   Additional reporting by Adam Samson