How to invest ahead of the US election

The finely balanced nature of the campaign increases the chance of volatility in the immediate run-up to the vote and its aftermath. The risk of market swings would be especially pronounced if either party gains control of the White House and Congress, giving them greater sway to enact bolder changes. A blue sweep could give the Democrats the ability to raise taxes, including on corporate profits. Meanwhile, victory by former President Trump could lead to higher import tariffs and a greater likelihood of trade conflicts.

Against this uncertain backdrop, capital preservation strategies can help mitigate risks. These offer the best value in periods of high interest rates and low implied volatility. At the time of writing, rates are still high by historical standards and volatility has normalized after a sharp move higher in early August.

Concern over the security and economic risks posed by trade with China is shared by both parties. So while the manner of intervention may vary depending on the election result, a trend toward protectionism is likely to continue regardless. Investors should therefore assume greater obstacles to free trade over the medium term.

While tariffs and other protectionist measures could pose risks to companies with international supply chains, such as some in the consumer discretionary sector, it could also accelerate investment trends like near-shoring. Sectors that benefit from near-shoring include infrastructure and robotics, as companies build up production facilities in alternative locations.

The election creates a range of risks that makes gold a potentially attractive hedge. Both parties have adopted tough language on trade with China, adding to the potential of an intensification of geopolitical tensions after the election. A risk-off move in equity markets could be possible if a Trump administration follows through on campaign promises for steep tariffs on imports or in the event of fears of higher taxes and regulation. Additionally, the election could contribute to worries over the scale of government borrowing, especially if either party wins a clear sweep. Each of these outcomes, while potentially challenging for equity markets, would represent a positive for gold prices, in our view. More broadly, the metal should also benefit from a weaker dollar ahead.

The sectoral implications of the election could be significant if all policy proposals come to fruition.

A win for the Democrats could prove a headwind for financial services due to stricter regulation; industrials, chemicals, and mining could face stiffer pollution controls; and healthcare could confront further pressure on pricing. Meanwhile, the impact on fossil-fuel-based energy companies would likely to be somewhat negative in the event of a blue sweep, though Harris has rejected curbs on fracking.

In case of a Republican victory, we would not expect significantly less government support for renewable energy given committed funding and significant solar and wind capacity in Republican-majority districts, whereas electric-vehicle-specific tax credits are potentially risk. Also, consumer goods would be particularly affected by tariff risks. Increased tariffs and the blowback from China could be a headwind for retailers, given their high reliance on goods manufactured abroad, especially in China. And parts of the tech sector would likely also be negatively affected if restrictions on trade in advanced technologies are curbed on national security grounds.

Avoiding excessive exposure to potentially heavily impacted sectors and ensuring adequate diversification across sectors and markets can help investors reduce potential risks, given the knee-jerk reactions that tend to occur heading into the election and directly after. Investors can also consider hedges and structured solutions to limit downside risks.

In foreign exchange, we also believe investors should hedge excessive exposure to currencies that may be vulnerable to an intensification of trade tensions, notably the Chinese yuan.