PERSPECTIVE3-5 min to read

Strategies for investing ahead of the US election

07/02/2024
us-capitol-building

Authors

Jason Yu
Head of Multi-Asset Management, Asia

The next US presidential and congressional elections will be held in late-2024, with Joe Biden and Donald Trump likely again contesting with one another for the presidency. The Democrats and the Republicans will also compete for control of the Senate, while the seats in the House of Representatives are reshuffled.

Volatility in financial markets is likely going to remain elevated in the run-up to the election in November. How should investors navigate the uncertainty that political events inject into financial markets?

It is worth noting that the current US election landscape is relatively balanced, with neither party holding a clear advantage. Historically, such a scenario has been positive for financial markets.

Further rise in US stocks hinges on two key factors

Should the US end up with a divided government, i.e. the Congress being controlled by the opposition party, the need for the President to negotiate with Congress in the course of passing legislation would significantly reduce the likelihood of extreme policies and lead to more moderate policy outcomes. For financial markets, this will lower uncertainty brought by extreme policy shifts.

While the outcome of the US presidential election is difficult to predict, fundamentals show that there are still abundant investment opportunities that are worth considering in 2024.

As far as US equities are concerned, the S&P 500 is currently trading near record-highs. The index’s ability to move higher this year will depend on two key factors: first, whether the Fed can provide more liquidity to support the broader markets through interest-rate cuts, and second, whether the US economy can achieve a soft landing.

Bonds preferred over equities

With global inflation and interest rates remaining elevated in recent years, some investment strategies that were previously viable may no longer be suitable. From a multi-asset allocation perspective, investors might consider gradually and moderately increasing their exposure to bonds in anticipation of potential rate cuts by the Fed in 2024.

Should inflation reach its peak, interest rate cuts will likely become the new norm. From a risk-return perspective, bonds could become more attractive than equities, offering investors both reasonable returns and a steady income stream.

We believe US Treasuries, investment-grade corporate bonds, and alternatives such as global convertible bonds and securitised credit, are some viable assets to consider.

In the meantime, we hold a positive view towards US and Asian investment-grade bonds. Given the sound earnings and fundamentals of US and Asian corporates, coupled with a potential shift in Fed policy, US and Asian investment-grade bonds could offer investors yields in the range of 5% to 6%. Besides, a potential decline in interest rates later in the year could further boost bond prices.

As macroeconomic conditions evolve, we are seeing early signs of US interest rates starting to moderate, and the strength of the US dollar could gradually weaken as rate cuts occur, potentially benefiting emerging markets.

In addition to the boost from a potential decline in US interest rates, continuous subdued inflation with room for rate cuts in emerging markets is expected to provide further support to domestic bond markets.

Key growth drivers for the next decade

Looking back at 2023, the US stock market rally was largely driven by the “Magnificent 7” tech giants.

Given elevated valuations in the tech sector, profit-taking by investors could lead to corrections in the valuations of tech stocks. As a result, we have turned neutral on US tech stocks in the near term.

Over the medium to longer term, however, if artificial intelligence (AI) remains the overarching theme driving the tech industry, this theme will continue to benefit US tech stocks, and the upward momentum could continue for longer.

Several other broad market trends are likely to be key growth drivers over the next decade. Global high-growth companies with high operating margins and high free cash flow, especially those from the US tech sector, could provide capital appreciation opportunities. Quality dividend-paying companies with resilient businesses and attractive valuations, as well as sectors and companies that will likely benefit from moderating inflation, could also perform well.

Apart from monitoring market developments ahead of the US elections in November, we are also mindful of the significant uncertainties stemming from geopolitical risks. It would be wise for investors to maintain a diversified portfolio by complementing stocks and bonds with flexible allocations to commodities (such as gold) and alternative asset classes.

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Authors

Jason Yu
Head of Multi-Asset Management, Asia

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