(Bloomberg) – Money managers in Asia employ a variety of traditional and unconventional strategies to cushion losses as they prepare for turmoil ahead and after the US presidential election.
Chinese stocks feature prominently in some expectations recommendations. The vote will have a limited impact on Asian assets. Derivatives that protect against a market slide are also listed in the strategies. Several investors are suggesting more conventional hedges like yen and gold and only holding cash to avoid risk.
And even as election fears ease with polls showing a growing lead for Democratic candidate Joe Biden, a poll by Bank of America Corp. found global fund managers are ready for extreme market volatility as they expect the outcome to be challenged.
“Global risk-weighted assets could be volatile in the short term as a controversial choice could pressurize them and keep them safe first,” said David Chao, Asia Pacific ex-Japan market strategist at Invesco, who oversees $ 1.2 trillion worldwide . “A diversified portfolio makes sense, especially one that includes safe haven assets and market-neutral strategies.”
Here is a selection of security ideas from asset managers:
“It seems prudent to focus on Asia versus the US to reduce election risk,” said Thomas Poullaouec, director of multi-asset solutions for the Asia-Pacific region at T. Rowe Price, given the strong earnings revisions that are economic Recreation and the attractive reviews in the region. The region’s outperformance could continue in the short term after the MSCI Asia Pacific Index outperformed the S&P 500 Index by more than two percentage points in September.
Democratic momentum in the US could boost Asian stocks
Invesco and State Street Global Markets continue to favor Chinese stocks due to the country’s faster economic recovery and high exposure to technology names. And a Biden win would mean less chaos in relations with the US, “which would have a positive impact on the Chinese stock market,” said Mark Matthews, head of Asia research at Bank Julius Baer & Co.
BNP Paribas Asset Management has turned to derivatives to protect itself from a fall in US stocks. Despite the political uncertainty, the S&P 500 is almost at an all-time high. “It pays to spend some of that profit on downside put protection, for which the cost can be neutralized by selling upside calls with at least tenors until mid-November,” said Paul Sandhu, head of the company’s multinational Asset-quant solutions and customer advice for the Asia-Pacific region.
The Australian dollar is the tool of choice to protect core investment positions from the US elections for strategists at Citigroup Inc.
A look at the correlations between US benchmark returns and stocks suggests that government bonds are no longer as effective as hedging risk, while port rallies in the dollar are “less strong,” wrote a team including Jeremy Hale wrote note on Thursday. The Australian dollar – especially against the Swiss franc – is much more strongly correlated with stocks, so it is better suited as a way to build short positions as a hedge against declines in stocks.
Gold, lagging markets
Adrian Zuercher, Head of Global Asset Allocation at Asset Management at UBS Group AG, is optimistic about the coming months, but is “aware” of the risks associated with the elections. “We therefore continue to advocate holding gold, increasing the return for diversification and shifting some of our linear equity exposure into optionality, which should bring us positive returns in falling and rising markets,” he said.
UBS Wealth has also turned to lagging markets that are doing well on valuations and reducing exposure to tech-sensitive markets, he added.
“We have long been Singapore, which is more of a game of values, and India, which is a domestic market, compared to Hong Kong, which is under the pressure of a Trump victory, or Thailand and Malaysia, which are trade-oriented,” said Zuercher.
For Julius Baer Matthews, however, cash or high quality bonds are better hedges than gold, as the yellow metal “has shown this year that it is more of a risky asset than a risky asset”.
Paul O’Connor, head of multi-asset at Janus Henderson Investors, expects the prospect of continued easing in public finances under a strong Democratic government to drive real bond yields higher and trigger a rotation from this year’s profitable assets towards the laggards becomes.
“We added some risk to reflation games in the US, such as value stocks in general and US regional banks in particular,” said O’Connor, adding that he has taken profits on assets that have been declining this year Real returns have benefited, such as investment grade credit and US tech stocks.
O’Connor believes that 10-year US Treasury yields could rise to 1% relatively quickly, on the back of the prospect of continued easing in public finances under a strong Democratic government.
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