• How would you diversify an investment portfolio through the following asset classes ahead of the Election?

Asset allocation prior to US elections

US dollar cash 10%

Commodities (precious metals) 10%

Equities 40%

Bonds (mainly short- and intermediate-term, high credit quality) 40%

The US election is unlikely to have a major impact on investor decisions about asset allocations.  Given the difficulty of passage of bills through the US Congress, a President may not have as much impact on the economy – particularly for fiscal measures.  International trade flows could be impacted, however, depending on the election outcome. This could lead to an economic slowdown and volatility in the stock market.

Overall due to the relatively high valuations in equities and the very low bond yields, it might be better not to be too aggressive in terms of taking risk. Too low a weighting in equities, however, could also be costly if stocks continue to climb higher and investors have too little exposure to them. Ideally, you would want to participate on any upside while also having dry powder to deploy in the case of a selloff.  Therefore a balance must be struck – as always - between risk and expected return.  Importance must also be given to each investor’s risk tolerance and specific circumstances – the above allocation assumes a medium- to long-term portfolio horizon with a moderate or average risk appetite.

  • Do you foresee any trading opportunities ahead of the Election? Which ones?

In the run-up to the US elections, some volatility should be definitely be expected.  Even though the Democratic candidate Hillary Clinton is seen as the strong favorite to win- particularly given the latest developments- markets will be closely watching the polls in the final weeks of the contest.  The market also appears to be positioned for a Clinton win, as such a victory is also seen as opening the way for a December interest rate hike by the Federal Reserve. 

Clinton is associated with less uncertainty whereas Trump, despite his background as a successful businessman, is seen as more unpredictable.  Therefore a Clinton victory could see the US dollar extend its recent gains and risk assets could also post some gains as well.  However, as the market is already giving Clinton a higher probability of winning, the moves in response to her potential victory are likely to be relatively smaller.

However, in the surprise event of a Trump victory, you could see significant swings in financial markets.  First of all, the Mexican Peso, which is clearly sensitive to what is happening in the US election, could drop by around 10%.  The Canadian dollar will also be impacted but to a smaller degree – probably in the region of 2-3%.  Therefore traders will do well to keep in mind the asymmetric nature of the US election risk; a Clinton win could mean business-as-usual but the less likely Trump win could bring about substantial volatility.

Furthermore, a potential Trump victory could unsettle markets by spooking investors about the risks of populism and political uncertainty around the world.  Such an outcome could be tied to the recent Brexit referendum outcome earlier in the year, where the anti-establishment vote did much better than what the experts predicted or indeed what the market was discounting at the time.

To sum up, some hedging – perhaps via options rather than outright long or short positions- could make sense ahead of the US elections as volatility is currently quite low.  The peso, the loonie, the US dollar more broadly, US bonds and US / global stocks are some of the financial instruments that could attract attention.

Forex trading and trading in other leveraged products involves a significant level of risk and is not suitable for all investors.

Feed news Join Telegram

Recommended Content


Recommended Content

Editors’ Picks

EUR/USD edges lower toward 1.0100 after dismal EU sentiment data

EUR/USD edges lower toward 1.0100 after dismal EU sentiment data

EUR/USD has extended its daily slide below 1.0150 after the data from Germany and the EU showed that the Economic Sentiment Index component of the ZEW Survey continued to decline in August. Investors await July housing data from the US.

EUR/USD News

GBP/USD extends slide toward 1.2000 after UK data

GBP/USD extends slide toward 1.2000 after UK data

GBP/USD came under renewed bearish pressure in the early European session amid risk aversion on Tuesday and declined toward 1.2000 before staging a modest rebound. The data from the UK showed that the ILO Unemployment Rate remained unchanged at 3.8% in June.

GBP/USD News

Gold struggles to recover above $1,780

Gold struggles to recover above $1,780

Following a consolidation phase above $1,780 in the Asian session, gold lost its traction and declined toward $1,775. The benchmark 10-year US Treasury bond yield holds in positive territory near 2.8%, making it difficult for XAU/USD to gather recovery momentum.

Gold News

Bitcoin price all but confirms a bearish breakout amid opposing on-chain metrics

Bitcoin price all but confirms a bearish breakout amid opposing on-chain metrics

Bitcoin price shows a confluence of bearish developments that suggests an incoming downtrend. This development could halt the bullish outlook seen in Ethereum and other related altcoins. Bitcoin price is in a classic Wyckoff Distribution Phase.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!

BECOME PREMIUM

Majors

Cryptocurrencies

Signatures