VIX contracts are implying a significant pickup in volatility around the U.S. presidential election, with the largest gap on record between the current VIX level and the second month contract, which expires just ahead of the Nov. 3 ballot, according to recent commentary from Mark Haefele, chief investment officer of UBS Global Wealth Management.
The gauge of implied U.S. equity volatility stands at 26, Haefele writes, while the second month contract is trading at 33. The seven-point spread is the largest since data started being collected in 2004.
“While election risks can be seen most clearly in implied S&P stock volatility, the U.S. vote will have implications globally and across a range of asset classes,” he says.
Following are several ways UBS thinks investors can prepare their portfolios for various possible outcomes.
A Blue Wave
In the event of a Democratic sweep of both the presidency and Congress, UBS believes stocks exposed to Democratic presidential nominee Joe Biden’s “green” agenda would benefit in the U.S. and abroad. However, the energy sector could face tougher regulations that UBS says are only partially priced in.
Health care, too, could suffer from bipartisan drug pricing rhetoric in the run-up to the vote, “but should enjoy a relief rally afterwards, even in a blue wave.”
Overall, long-term themes that should benefit include companies involved in smart mobility and energy efficiency in the U.S., Europe and Asia.
UBS expects a blue wave to accelerate the U.S. dollar’s decline, with Biden pursuing a less aggressive pro-growth agenda than the incumbent.