How will the results of the US election impact global portfolios?

James Lewis , UK Chief Investment Officer and Julius Bendikas, CFA , European Head of Economics and Dynamic Asset Allocation

The results are in: Donald Trump is the 47th President-elect, winning the popular vote, with the Republican Party taking the Senate and expected to take the House of Representatives.

We are strong advocates of taking a long-term approach to portfolio construction. Risk management is crucial. In election scenarios, however, some agility may be warranted to ensure that portfolios remain resilient through periods of potential change. With this in mind, we wanted to take the time to explain our positioning around the US elections in UK discretionary portfolios.

Reducing risk ahead of potential volatility

With the race for the White House reported to be neck and neck for weeks, it wasn’t possible to know the election outcome ahead of time. As we noted in our outlook paper before the election, a Trump victory is expected to bring the potential for greater change. But with that said, Trump’s sweep to victory certainly doesn’t represent a black swan even; most portfolios would not have required a profound shift in positioning, regardless of the results. Elections always bring uncertainty, and investors need to be able to look through the day-to-day to remain long-term in their perspective and time horizon.

However, with an economy as big and important as the US, and a policy binary as different as that between Kamala Harris and Donald Trump, some agility is beneficial. In UK portfolios where we have dynamic asset allocation discretion, we adjusted positioning ahead of the election to reduce risk.

In practice, this involved reducing our equity overweight to neutral, making small cuts from our Japanese equity, emerging market equity and real estate investment trust allocations, as well as from frontier market debt. We also reduced our underweight in global government bonds and bought the US dollar. These shifts amount to a more “risk off” approach ahead of a period with the potential for increased volatility.

Many, if not all, of these positions – particularly on the equity side - had been value additive over the last year or more, so provided an opportunity to realize some of the gains that had built up across our discretionary portfolios in the UK.

LDI has also been front of mind. With the UK budget taking place in late October and then the US election following the week after we have been closely assessing yields closely to ensure that we have the correct governance and risk controls in place to manage LDI portfolios.

As we even with the full outcome of the election now largely known, a lot of uncertainty remains. Trump has been critical of the Inflation Reduction Act, for instance, although it largely benefits states that have voted Republican, so it’s not clear whether he will reverse it.

Similarly, many of the potential outcomes of a Trump administration, from trade tariffs to elevated geopolitical tensions, are uncertain but potentially inflationary. Where appropriate, in our discretionary UK portfolios, we have added an allocation to commodities to help inflation-proof our portfolios against unexpected inflation spikes which could become more prevalent.

As we enter a period with higher expected volatility, it looks likely that diversification may yet become even more critical. While the S&P 500 and NASDAQ have delivered bumper returns in recent times, it will be important for portfolios to ensure they incorporate and maintain other return drivers for investors seeking to manage volatility.

We characterized 2024 as “the age of agility”; as we near the end of the year, it’s clear the age of agility is set to endure.

For more on the economic and market impact of the US election, join our webinar on November 14th.

Important notices:

Commentary is for illustrative purposes only and is not intended as a comprehensive guide to election impact. Information is subject to change. As of November 12, 2024

References to Mercer shall be construed to include Mercer (US) LLC and/or its associated companies.

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