Bloomberg – Money managers in Asia are deploying a range of traditional and unconventional strategies to cushion any losses as they brace themselves for turbulence in the lead-up to and aftermath of the United States presidential election.
Chinese equities feature high in some recommendations on expectations that the vote will have a limited impact on Asian assets, while derivatives that protect against a market slide are also listed among the strategies.
Several investors suggest more conventional hedges such as the yen and gold, as well as just holding cash to avoid risk exposure.
And even as election fears ebb with US polls showing a widening lead for Democratic candidate Joe Biden, a Bank of America survey showed global fund managers are ready for extreme market volatility as they expect the election outcome to be contested.
“Global risk assets could experience near-term volatility as a disputed election could initially put downward pressure on them and cause a flight to safety,” said Mr David Chao, market strategist for Asia-Pacific ex-Japan at Invesco. “A diversified portfolio makes sense, especially one that includes safe-haven assets and market-neutral strategies.”
Mr Thomas Poullaouec, head of multi-asset solutions for Asia-Pacific at T. Rowe Price, said that “it seems rational to focus on Asia versus the US to reduce election risk”, given the region’s strong earnings revisions, economic recovery and attractive valuations.
The region’s outperformance could continue in the short term, he added, after the MSCI Asia-Pacific Index beat the S&P 500 Index by more than 2 percentage points in September.
The Asian measure was up 3.2 per cent as at the end of last month, tracking the 3.6 per cent gain in the US gauge.
Democratic sweep in the U.S. could boost Asian stocks
Invesco and State Street Global Markets continue to favour Chinese equities because of the country’s faster pace of economic recovery and big exposure to technology names.
A Biden win would signal less chaos in relations with the US, “which would be positive for the Chinese stock market”, said Mr Mark Matthews, head of Asia research at Bank Julius Baer.
BNP Paribas Asset Management has turned to derivatives to protect against a slide in US equities, with the S&P 500 close to an all-time high.
“It is worth it to spend some of that gain on downside put protection, for which costs can be neutralised by selling upside calls at least with tenors into mid-November,” said Mr Paul Sandhu, the firm’s head of multi-asset quant solutions and client advisory for Asia-Pacific.
The Australian dollar is the tool of choice to protect core investment positions ahead of the US election for strategists at Citigroup.
A look at the correlations between benchmark US yields and stocks suggests Treasuries are not as effective as a risk-off hedge as they used to be, while haven rallies in the dollar are “less potent”, a team including Mr Jeremy Hale wrote in a note.
The Australian dollar – especially against the Swiss franc – has been much more correlated to stocks, leaving it better placed as an avenue to build short positions as a hedge against equity downside, they said.
Mr Adrian Zuercher, head of global asset allocation at UBS Group’s wealth management arm, is optimistic about the months ahead, but still mindful of the risks related to the election.
“So we continue to advocate holding gold, adding yield for diversification, and shifting some of our linear equity exposure into optionality, which should give us positive returns in falling and rising markets,” he said.
UBS Wealth has also turned towards lagging markets which score well on valuations and reduced exposure to technology-sensitive markets, he added.
“We are long on Singapore, which is more a value play, and India, which is a domestic-driven market, versus Hong Kong which would see pressure from a Trump victory or Thailand and Malaysia which are trade oriented,” he said.
Still, for Julius Baer’s Mr Matthews, cash or high-grade bonds are better hedges than gold because the yellow metal has “proved this year that it is more of a risk-on asset than a risk-off one”.
Mr Paul O’Connor, head of multi-asset at Janus Henderson Investors, expects the prospect of sustained fiscal easing under a strong Democrat government to push real bond yields higher, triggering a rotation from this year’s winning assets towards the laggards.
He expects the 10-year US Treasury yield could rise to 1 per cent fairly briskly, driven by the prospect of a sustained fiscal easing under a strong Democrat government.
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