How can investors hedge US election risks?

With the 2024 U.S. presidential election approaching, analysts expect uncertainty and volatility to rise in the markets.

The race between Vice President Kamala Harris and former President Donald Trump remains highly fluid, with polls indicating a narrow lead for Harris in key battleground states. Although this unpredictable environment poses potential risks to markets, strategists at UBS advise against making dramatic portfolio changes based solely on electoral predictions.

“Electoral shifts have tended to produce temporary volatility, making large sectoral shifts to reflect predictions about the outcome dangerous in our view,” strategists note.

Instead, UBS recommends that investors consider several strategies to hedge against the potential volatility surrounding the election.

The Swiss franc and gold are highlighted as effective hedges. The Swiss franc, known for its safe-haven status, is particularly appealing in times of political uncertainty, especially since the Swiss National Bank is unlikely to cut rates significantly further.

Gold, on the other hand, offers a hedge against concerns over the stability of the U.S. dollar, which could be threatened by geopolitical tensions or an unsustainable U.S. fiscal deficit.

Lastly, structured strategies are also recommended by UBS strategists. These “can enable investors to retain exposure to further potential gains in stocks, while reducing sensitivity to a temporary correction,” the bank said in a recent note.

By using structured products, investors can benefit from market upsides while having a buffer against possible downturns.

Moreover, strategists have identified stocks that are likely to be highly sensitive to election outcomes, particularly in the U.S. consumer discretionary and renewables sectors. In addition, they highlight the Chinese yuan as a currency where managing overexposure might be prudent given the potential for increased election-related volatility.

UBS also warns against overreacting to polling data. While the election outcome is uncertain, it is not the primary driver of financial market returns. Economic data and Federal Reserve rate expectations are likely to have a more significant impact.

Thus, UBS suggests that investors focus on improving the resilience of their portfolios rather than attempting to predict the election outcome.

According to the latest poll data, Vice President Kamala Harris holds a narrow lead over former President Donald Trump. The ABC News/Ipsos poll released on Sunday shows Harris leading Trump 50% to 46% among all adults and registered voters.

Source: Investing.com