With the US presidential election just days away, many investors are pondering how would a Clinton or Trump victory impact financial markets and their portfolios.

We do believe a Trump win could cause significant short term uncertainty and greater volatility and may accentuate some of the concerns we have held regarding risks embedded in high valuations levels of US assets (both equities and bonds).

There are also some longer term concerns if a Trump presidency was able to implement some of the more extreme policies he has proposed (eg significant trade barriers, more isolationist US foreign policy approach, immigration controls).

In recent days, and particularly with the reopening of the FBI email investigation last Friday, the vote has tightened adversely impacting financial markets that had previously priced in a near certain Clinton win.

Despite this we believe the Stonehouse Core Value Portfolio (CVP) is relatively well positioned for these challenges in the event of a Trump win.

  • The SCVP already reflect a cautious view on US equities and bonds, based primarily on longer term valuations factors rather than any view about the election outcome;
  • There is a reasonable amount of cash that could take advantage of severe market weakness should it occur;
  • The alternatives exposure is quite significant and should hold up reasonably well in a Trump scenario;
  • There is indirect gold exposure( through gold equities eg Allan Gray/Platinum and Gold Bullion via AQR Managed Futures); and
  • We have protection via put options and volatility funds that would also provide some support during serious weakness.

While we are not dismissing the potential adverse implications of a Trump win, the nature of these events is that attempting to finesse portfolios in the midst of sharp global moves is difficult and often detrimental to performance especially if emotionally driven. We believe it is better to position the portfolio based on the longer term fundamentals and valuation drivers while being prepared to react quickly if those sharp moves create particularly attractive opportunities consistent with that longer term view.

It is worthwhile noting that given our view on longer term fundamentals, we don’t believe a Clinton win would necessarily provide an “all clear” to markets. Having said that a convincing Clinton win would likely provide a relief rally for US equities and the US dollar.

We should also highlight that there are scenarios where the result is close and may even be contested which could result in significant volatility in the near term (perhaps even more so than a clear Trump win) with the longer term implications dependent on how this is resolved.

 

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