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Money managers in Asia are implementing a variety of traditional and unconventional strategies to cushion any losses as they Prepare for turmoil in the run-up to and after the US presidential election.
Chinese stocks stand out in some recommendations on expectations that the vote will have a limited impact on Asian assets, while derivatives that protect against a market downturn are also listed among the strategies. Several investors suggest more conventional hedges, such as the yen and gold, as well as holding cash to avoid exposure to risk.
And even as electoral fears it ebbs with polls showing a growing lead for Democratic candidate Joe Biden, a Bank of America Corp. The survey showed that global fund managers are ready for extreme market volatility as they expect the result to be challenged.
“Global risk assets could experience short-term volatility as a contested choice could initially push them down and cause a flight to safety,” said David Chao, market strategist for Asia Pacific excluding Japan, at Invesco, which oversees $ 1.2 trillion globally. “A diversified portfolio makes sense, especially one that includes safe-haven assets and market-neutral strategies.”
Here is a selection of hedging ideas from asset managers:
Asia Allure
“It seems rational to focus on Asia versus the US to reduce electoral risk,” given the region’s strong earnings revisions, economic recovery and attractive valuations, said Thomas Poullaouec, director of multi-Asset Solutions for Asia Pacific at T. Rowe Price. The region’s outperformance could continue in the near term, he added, after the MSCI Asia Pacific Index outperformed the S&P 500 Index by more than two percentage points in September.
Democracy sweep in the US could boost Asian stocks
Invesco and State Street Global Markets continue to favor Chinese stocks due to the faster pace of the country’s economic recovery and high exposure to tech names. And a Biden victory would indicate less chaos in relations with the United States, “which would be positive for the Chinese stock market,” said Mark Matthews, head of Asia research at Bank Julius Baer & Co.
Put purchase
BNP Paribas Asset Management has turned to derivatives to hedge against a decline in US equities, with the S&P 500 near an all-time high despite political uncertainty. “It is worth spending part of that gain on protection of put down, the costs of which can be offset by selling up call options at least with maturities until mid-November,” said Paul Sandhu, chief operating officer of the firm. multi-quantitative asset solutions and advice to clients for Asia Pacific.
Australian dollar
The Australian dollar is the preferred tool to protect core investment positions ahead of the US elections for strategists at Citigroup Inc.
A look at the correlations between benchmark US yields and stocks suggests that Treasuries are not as effective as a hedge as they used to be, while dollar rallies are “less powerful,” he wrote. a team that included Jeremy Hale in a note on Thursday. The Australian dollar, especially against the Swiss franc, has been much more correlated with equities, leaving it in a better position as a way to build short positions as a hedge against the decline in equities, they said.
Hedge edge
Equity correlations suggest that the Australian dollar is a better way to hedge risk than Treasuries
Source: Bloomberg, Citigroup
Gold, lagging markets
Adrian Zuercher, head of global asset allocation in the wealth management division of UBS Group AG, is optimistic about the coming months, but remains “aware” of the risks related to the elections. “So we continue to advocate holding gold, adding returns for diversification, and shifting some of our linear equity exposure to optionality, which should give us positive returns in rising and falling markets,” he said.
UBS Wealth has also targeted lagging markets that score well in valuations and reduced exposure to technology-sensitive markets, he added.
“We are a long time in Singapore, which is more of a value game, and India, which is a market driven by the domestic market, versus Hong Kong, which would see the pressure of a Trump victory or Thailand and Malaysia, which are oriented to trade, “Zuercher said.
Still, for Julius Baer’s Matthews, cash or high-grade bonds are better hedges than gold because the yellow metal “has shown this year that it is more of a risky asset than a riskless one.”
Reflation Games
Paul O’Connor, Director of multi-As an asset to Janus Henderson Investors, he expects the prospect of sustained fiscal relaxation under a strong Democratic government to push up real bond yields, triggering a shift from this year’s earning assets to laggards.
“We’ve added some exposure to reflation games in the US, such as value stocks in general and regional US banks in particular,” O’Connor said, adding that it has made gains on assets that have benefited from falling real returns this year, such as investment grade credit and US tech stocks.
O’Connor expects the 10-year US Treasury yield to rise to 1% fairly quickly, fueled by the prospect of sustained fiscal relaxation under a strong Democratic government.
– With the assistance of Chester Yung, Cecile Vannucci and Cormac Mullen
