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.
As for credit markets, the election outcome could affect spreads in specific sectors, such as energy, health care and autos for the reasons stated above.
A Red Wave
Energy would be the biggest winner in a Republican sweep, UBS says, reflecting relief that the sector would likely avoid the stricter regulations proposed by the Democrats.
UBS expects a continued tough line on trade in a second Trump administration, leading to accelerated reshoring of production to the U.S. That could benefit both American and European and Asian companies involved in automation and robotics. Tariff threats would remain a risk for European and Asian exporters.
In a red wave, the greenback would remain under pressure given the narrowing of the U.S. rate advantage, but the pace of depreciation would slow because a second Trump term would likely generate a dollar-positive mix of tax cuts, fiscal spending targeted at infrastructure and deregulation.
For investors who want to maintain equity exposure without adding significant policy or headline risk, UBS sees strong potential in enabling technologies, which stand to grow swiftly regardless of the outcome of the November vote.
These technologies include artificial intelligence, augmented reality, virtual reality, big data, cloud computing and 5G. UBS expects them to grow by double-digit percentages on average during the next few years.
The election outcome? According to UBS, prediction markets now see a roughly 60% chance of a Biden win, and even a roughly 50% chance of a Democratic sweep of both the House and Senate. It notes, however, that these markets have failed recently to correctly predict results.
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