Sen. Elizabeth Warren, D-Mass, presidential candidate Sen. Elizabeth Warren at SXSW. (Photo: Callaghan O’Hare/Bloomberg)

The upcoming 2020 presidential election is upending the age-old warning to never mix politics with investing.

Major U.S. and global financial firms like Morgan Stanley, T. Rowe Price and UBS are all discussing the election in their 2020 outlook reports and meetings with members of the press, including the what-ifs of an Elizabeth Warren presidency.

The 2020 U.S. presidential election seems to be replacing the U.S.-China trade war as the primary geopolitical market risk, although concerns about the trade war continue because there’s been no resolution yet.

Mike Ryan, chief investment officer Americas for UBS Global Wealth Management, says the question he’s “being asked most recently and most often” from investors is about the meaning of the U.S. election for their portfolios.

“We continue to say ‘Don’t get too caught up on elections,’ but the U.S. election is the exception. Fifty-five percent of the companies in the MSCI All Country World Index are U.S.-based, U.S. Treasuries are the global benchmark … and 90% of the trade transactions are done in U.S. dollars. We have to pay attention to it.”

Most of Wall Street’s concerns about the presidential election focus on Democrats. Firms are worried about an increase in corporate taxes — most Democratic candidates favor repealing the 2017 corporate tax cut or raising corporate taxes from their current level, in addition to  higher personal taxes for the wealthy — as well as a wealth tax, which Warren has proposed for taxpayers with net worth of $50 billion, and increased regulation on health care, financial and energy sectors.

“As President Trump’s woes continue to mount, the market is more and more focused on who the Democratic nominee is going to be,” said John Linehan, chief investment officer for equity at T. Rowe Price.

The potential effects of a Trump re-election are not mentioned as frequently, if at all, perhaps because he is the devil that Wall Street knows or because his re-election odds are uncertain.  There’s even talk that Trump could be replaced as the Republican nominee due to fallout from the impeachment inquiry, though at this point even if the House votes for impeachment, the Senate is not expected to vote him out of office.

But even a Democratic presidential win doesn’t mean the policies that Democratic candidates are advocating will be enacted.

Referring to a potential corporate tax increase, UBS strategists note in their Year Ahead 2020 outlook that “raising taxes would require congressional approval, and passing such a tax hike would only be likely if Democrats secure the White House and a large majority in Congress,” In other words, if the Democrats don’t take the Senate and continue to hold on to majority rule in the House, a corporate tax increase is not very likely.

But a Democratic presidency could benefit certain sectors such as renewable energy producers and some utility stocks that are big users of those alternative energy sources while hurting oil and gas producers, according to strategists.

UBS cites its own Investor Watch on the Year Ahead, showing that 45% of investors expect a positive impact if the Democratic candidate wins; 40% do if Trump prevails.

Given the uncertainty about the upcoming presidential election and mixed sentiment about the election outcome, market strategists are emphasizing the need for investors to diversify their holdings.

“You can’t depoliticize portfolios, but there are steps you can take,” said Ryan. They include diversifying portfolios globally and across classes and regulatory risk.

His colleague Min Lan Tan, head of the Asia Pacific Investment Office for UBS Global Wealth Management, recommends companies that depend more on consumer spending than business spending if the U.S.-China trade war continues, and there is still no resolution.

She also favors businesses that would benefit from alternative supply chains outside of China, such as companies in Vietnam. “The supply chain migration will continue.”

Linehan suggests nondefensive companies with high dividend yields and companies that  benefit especially from technological in innovation.

Lisa Shalett, chief investment officer, Wealth Management, at Morgan Stanley recommends “stocks with reasonable valuations that deliver some income, which can support valuations in a downturn.”

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