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ElectionWatchInvestment implications of the 2020 US elections

6 July 2020Chief Investment Office GWMInvestment Research

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Background

Introduction

How to invest

Scenario analysis

Preparing portfolios for November

“The chief task in life is simply this: to identify and separate matters so that I can clearly say to myself which are externals not under my control, and which have to do with the choices I actually control.”

—Epictetus, The Discourses, Book 2, Chapter 5

Against a backdrop of an ongoing pandemic, ex-treme social unrest, economic suppression, and in-creasing distrust in our shared public institutions, the 2020 US presidential election couldn’t come at a more turbulent time. The philosopher Epictetus’s advice will serve us well over the next four months. We can control our risk management, our portfo-lios, and our reactions to events. We cannot control the events themselves, nor can we predict the out-comes. Focusing on areas over which we have some control, instead of those we do not, is likely to lead to better results and less angina along the way.

This report focuses exclusively on the investment as-pect of the upcoming election. The authors are citi-zens and residents of the United States and, like all people around the world, hold a range of opinions and concerns about the issues of the day. You will not find those opinions in this report. Our jobs re-quire us to be impartial observers, to view the world as it is, not as we think it should be. In line with that perspective, the objective of this report is straight-forward. We aim to help investors prepare, as effec-tively as possible, for the upcoming US presidential election, which will be held on 3 November 2020.

Our primary goal is to help investors prepare their portfolios for the upcoming US presidential election.

A version of this report is available with specific security recommendations. For a copy, please consult a UBS Advisor.

This report has been prepared by UBS Financial Services Inc. Please see important disclaimers and disclosures that begin on page 13.

https://www.ubs.com/global/en/wealth-management/chief-investment-office/market-insights/regional-outlook/us-elections.html?cc


2ElectionWatch 2020 | ubs.com/electionwatch


Background

Introduction

How to invest

Scenario analysis

incrementally preparing for potential outcomes. As a first step, investors should review their strategic as-set allocations to ensure they are well positioned heading into the election. We believe the Liquidity. Longevity. Legacy.* process is the most effective way to do so. Next, between now and the election, we will provide most of our election guidance as part of tactical preferences published in the monthly UBS House View. The election is not yet a driving force behind our shorter-term tactical guidance, but will increasingly be a core driver of those views. Fi-nally, the Republican and Democratic policy agendas are fairly disparate. The election will result in winners and losers within certain industries, so we have pro-vided preliminary Trump and Biden trade baskets in this report to reflect each respective outcome.

The report is organized as follows:

First, we examine the current economic and mar-ket environment that will lead us into the election. In particular, forecast uncertainty is likely higher to-day than at any point in the last four decades. We must acknowledge, and embrace, that uncertainty in our decision-making.

Second, we examine the expected impact from po-tential election outcomes on various asset classes. Election prediction markets currently are pricing in a better-than-even chance of a Blue Wave (i.e., Demo-cratic control of the presidency, House of Represen-tatives, and Senate). And yet, lest we forget, Donald Trump is an ardent campaigner and four months is a lifetime in the context of a presidential campaign. Alternative outcomes also must be considered. While it’s highly likely that Democrats will retain control of the House, a unified government under GOP control is still possible if the president’s ap-proval rating improves markedly this autumn.

Third, we lay out a three-step process for investing between now and November. Most investors should not make major changes to their portfolios in the lead up to the election, but it is not too early to start

Fun fact: Congress did not establish a uniform day for presidential elections until 1845. The first Tuesday in November was chosen because the harvest was over and it allowed people to travel to polling places after the Sunday Sabbath.

The 2020 countdownFigure 1

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The next primaries for two states are 1 day away

The Democratic National Convention is 42 days away

This report was published on 6 July The Republican National Convention is 49 days away

The first presidential debate is 85 days away

Election Day is 120 days away

*Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.

As of this report publish-ing, there are 120 days until Election Day on 3 November. Four months is a lifetime in the context of a presidential campaign.

The election will result in winners and losers within certain industries, but most investors should not make major portfolio changes at this time.

https://www.ubs.com/electionwatch



Background

Introduction

How to invest

Scenario analysis

Scott Baker, an associate professor of finance at Northwestern University’s Kellogg School of Man-agement, publishes a widely followed index of economic uncertainty. The accompanying chart, a global version of the index, is a visual confirmation of what many investors have felt over the first half of 2020. High economic policy uncertainty, which historically has been associated with lower eco-nomic growth and is believed to increasingly be a cause of large equity price movements, reached dramatic new highs in May (Fig. 2).

Against the COVID-19-induced economic suppres-sion, global interest rates cratered (Fig. 3) and eq-uity markets produced four of the seven largest daily moves in the last 50 years (Fig. 4). The market recovery notwithstanding, we’re not out of the woods yet. Market participants, reasonably, expect volatility to remain high into the fall (Fig. 5).

In this context, large market moves are neither ir-rational nor unexpected. Going back to funda-mentals, the value of a financial asset is equal to

Uncertainty abounds

Some measures of uncertainty spiked tounprecedented levels in May 2020

Source: https://www.policyuncertainty.com, UBS

Figure 2

Monthly Global Policy Uncertainty Index

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Global Treasury rates have plummetedin 2020

Source: Bloomberg, UBS, as of 26 June

Figure 3

Barclays Bloomberg Global Treasury Index

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Market participants expect volatility toremain high

Source: Bloomberg, UBS, as of 29 June

Figure 5

VIX Index and futures curve

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VIX Index VIX Futures Implies Path

Date Return

19 October 1987 –20%

16 March 2020 –12%

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12 March 2020 –10%

24 March 2020 9%

13 March 2020 9%

Source: Bloomberg, UBS

Figure 4

2020 is shaping up to be one of the most volatile on recordWidest daily price changes in the S&P 500; 2020 shaded in gray

Between economic policy uncertainty and the COVID-19 pandemic, large market moves are neither irrational nor unexpected.




Background

Introduction

How to invest

Scenario analysis

the discounted value of its future cash flows. Re-search indicates that public markets discount fu-ture cash flows 10-15 years in the future, so the large daily price moves we experienced in March were an indication that the equity market was pricing in new information about COVID-19 that could have had a significant, long-term impact on shareholder value.

The good news is that none of the election out-comes—even a Blue or Red Wave—are likely to have as significant an impact on markets as CO-VID-19. Even so, elections do have consequences. It’s currently too early to be highly confident about the election or policy outcomes, but the result will,

on a relative basis, create winners and losers within the equity market, have an impact on tax policy, and shift the drivers of macroeconomic growth and risks to that growth.

Did you know? A resolution requiring the direct election of the US president passed the House during the 91st Congress in 1969 but failed to pass the Senate. The resolution would have required a runoff if no candidate received more than 40% of the vote.

Join the conversation

Join us for a series of five virtual events that go beyond politics to help you understand how the election impacts you. Each event features different US leaders and policy mak-ers who will discuss healthcare, infrastruc-ture, foreign policy, and more.

Visit ubs.com/electionwatch for details.

None of the potential elec-tion outcomes are likely to have as significant an impact on markets as COVID-19.

Among other conse-quences, the result of the election will shift the driv-ers of macroeconomic growth.






The impact of potential election outcomes

A clean sweep?

For decades, prediction markets have provided an alternative to polling data for measuring expecta-tions on election outcomes. These markets allow participants to vote with their wallets, betting on the outcome of an election. To give an example, a contract paying USD 1 if candidate X wins the election might trade at 30 cents, implying that she has a 30% chance of victory. We acknowledge up front that prediction markets are less than perfect for our purposes. They are tiny relative to the size of financial markets, and may be unduly influenced by transitory changes in sentiment. Also, because they are not very deep, they tend to have quirks, like the probabilities of all possible outcomes for an event adding up to more than 100%. However, in our view, they still offer useful guidance beyond polling data on election probabilities.

Until recently, prediction markets saw President Donald Trump as the favorite over Joe Biden even though the former vice president was well ahead in the polls. This perhaps makes sense given that Trump would likely win the Electoral College if the popular vote is close, and there is also plenty of time for polling data to change before the election.

However, as Biden’s advantage in the polls in-creased during the month of June, the betting markets swung to his side. Markets also see a high probability of a Blue Wave if Biden wins the elec-tion. At the same time, even though polling seems to suggest that the Democrats will comfortably hold on to the House, markets show a 1-in-3 chance of a Red Wave if Trump wins.

Combining the Blue Wave and Red Wave probabili-ties yields around a 2-in-3 chance of a unified gov-ernment, although a Blue Wave is 3.3 times more likely than a Red Wave. Among the split government scenarios, a retention of the status quo is seen as a more likely outcome than Biden winning the presi-dency but the GOP retaining control of the Senate.

If nothing else, the 2016 election provided us with a modern-day reminder (Harry Truman’s victory over Thomas Dewey in 1948 being the previous ex-ample) that a candidate favored by pollsters does

not always win once the votes are counted. Elec-tions, not public opinion polls, determine winners.

The novel coronavirus has wreaked havoc with many aspects of modern life. Elections are not im-mune. The prevalence of absentee voting will, in all likelihood, delay the reporting of results in many states. If the election is close, we may not know who will have won the Oval Office with any cer-tainty until sometime after 3 November.

Evaluating the implication of various election scenarios

The surge of COVID-19 infections has preoccupied financial markets in recent weeks, while the presi-dential election and future composition of Con-gress is of secondary importance today. This will not last indefinitely, though, because the election outcome will have significant implications for in-vestor portfolios. That was the case in 2016, when President Trump’s surprise victory triggered the so-called “Trump Trade” across financial markets. Stocks and risky credit rallied, interest rates rose, and the US dollar initially strengthened as investors rushed to price in a combination of lower taxes, looser regulation, and higher fiscal spending.

Background

Introduction

How to invest

Scenario analysisBiden leads in polls

Source: Bloomberg, UBS, as of 25 June 2020

Figure 6

RealClearPolitics Trump vs. Biden polling average, in %

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Prediction markets are not perfect but do offer useful guidance on election prob-abilities.

Some prediction markets show a 2-in-3 chance of a unified government rather than a divided one.

Donald Trump’s victory in 2016 triggered rallies in stocks and risky credit, plus other movement in financial markets.




While positioning portfolios today for a specific outcome in November is ill-advised, it’s important to recognize that Trump and Biden have promul-gated divergent economic and fiscal policies. In a second term, we believe President Trump would fo-cus on deregulation, an “America first” approach to international trade, and tax reductions (which may consist of making permanent and perhaps ex-panding the tax cuts in the 2017 Tax Cuts and Jobs Act). By contrast, Joe Biden would seek to increase spending on climate change mitigation, expand ac-cess to federally funded healthcare, and raise taxes on corporations and high-income earners. The need for more infrastructure investment is among the few issues on which both candidates agree, but neither candidate has outlined how to pay for the public improvements. Please see our Election-

Watch report dated 25 March for further details on the policy proposals of the two candidates.

As one former governor of New York once said, politicians campaign using poetry but end up gov-erning in prose. A policy platform is one thing, but what actually gets implemented is another. The composition of Congress, geopolitical develop-ments, and the state of the economy in 2021 all will influence how the next administration will function. There are four plausible electoral scenar-ios, two of which result in a unified government (Blue Wave or Red Wave) and two with a divided government (either Trump or Biden with a Republi-can Senate and Democratic House). For each sce-nario, we forecast the likely impact on the US economy, equities, and fixed income (Fig. 7).

Background

Introduction

How to invest

Scenario analysis

Figure 7

US election and policy scenarios

Blue Wave (DDD) Biden (DRD; GOP Senate) Status quo (RRD) Red Wave (RRR)

Slightly positive

Focused on the economic recovery. Spending on stimu-lus, healthcare, infrastruc-ture, and climate change more than offsets higher taxes (corporate, personal, investment).

Risks: Tax increases may be gradual, but still negatively impact business sentiment now, along with more regu-lation.

Neutral / slightly negative

Tax increases constrained by Senate, same for spending initiatives, unless recovery still requires stimulus, then infrastructure spending.

Negative for growth: Regula-tions go up on climate, energy, financials

But trade tensions and global uncertainty, especially ex-China, decline.

Neutral

Deregulation continues, but more uncertainty on trade and global conflicts.

Possible infrastructure spending as pure stimulus, but amount is contingent on how economy is recovering.

Tax cuts unlikely, but so are tax increases.

Slightly positive

Extension of the tax cuts in the Tax Cuts and Jobs Act (TCJA) more likely than addi-tional tax cuts.

Potential infrastructure spending and continued deregulation.

Risks: Additional tariffs on China and potentially other countries.

Neutral

Fiscal expansion offsets tighter regulation and higher taxes.

Negative: Financials, energy

Somewhat positive: Industri-als, materials

Mixed: Healthcare, utilities

Neutral / slightly negative

Increased regulation.

Positive: Consumer discre-tionary, consumer staples, industrials, materials

Negative: Energy

Neutral

Renewed trade war is a risk.

Slight negative on trade war risks: Industrials, materials

Neutral / positive

Additional stimulus but renewed trade war risks.

Positive: Financials, energy

Rates and inflation expecta-tions rise slightly faster on fiscal stimulus.

Credit spreads widen initially on fear of higher taxes but retrace on fiscal stimulus. Treasury curve steepens. Municipals rally on prospects for higher taxes and more federal aid to states.

Rates and inflation expecta-tions unchanged.

Credit spreads follow equi-ties but could widen initially, with more volatility due to expectations about more stringent regulation.

Rates and inflation expecta-tions unchanged.

Credit spreads move with equities, gradually tightening as the economy recovers amidst a lenient regulatory environment.

Rates and inflation expecta-tions rise slightly faster as deficit increases faster.

Corporate high yield outper-forms—expectations of loose regulatory environment drive valuations.

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Trump would likely focus on deregulation, interna-tional trade, and tax reductions.

Biden may focus on climate change mitigation, healthcare, and tax increases.




Divided government: Policy through regulation

The critical distinction for investors is whether the November election results in a unified or a divided government. Gridlock in D.C. makes enacting tax and spending legislation very difficult, leaving reg-ulatory and trade policy as the main economic pol-icy drivers. Tougher regulations with a Biden ad-ministration are a headwind for certain sectors in the equity market, and could be a modest negative for economic growth, but the overall impact is small relative to fiscal policy.

Meanwhile, compared with Trump, Biden’s reluc-tance to use tariffs as a geopolitical tool could be a tailwind for the economy and markets. Biden is likely to revert to a globalist approach when deal-ing with most of America’s trading partners. Bilat-eral trade relations with China may prove an ex-ception, but, even here, we expect that Biden would be less willing than President Trump to use tariffs as an overt tool of foreign policy. The ad-verse impact of more aggressive regulation versus more adversarial trade policies could cancel each other out, leaving the economic and market trajec-tories relatively unchanged from their current course regardless of who is elected.

Unified government: A bigger impact

It’s a different story entirely with a unified govern-ment, which could result in more substantial changes to fiscal policy. To prepare for the possibil-ity of Blue and Red Wave outcomes, we consider the characteristics of a “Trump Trade 2.0” versus a “Biden Trade.”

Trump Trade 2.0The main characteristics of the first Trump Trade are likely to persist in version 2.0, albeit in dimin-ished magnitude. The expected pro-growth policy mix of tax cuts, fiscal spending targeted to infra-structure, and deregulation would be incrementally positive for growth and equities. Financials and en-ergy could benefit both because they are key ba-

rometers of economic growth and because the un-certainty of potential regulatory changes under a Biden win would be eliminated. This policy mix could also benefit value stocks more broadly. How-ever the risk of a reescalation in the trade wars could temper investor enthusiasm.

In fixed income, faster growth and larger deficits should spur slightly higher inflation expectations and interest rates, and a steeper yield curve. With the Federal Reserve staying on hold through at least 2022, the rate rise should occur primarily at longer maturities. Thus, investors can expect lon-ger-duration fixed income to underperform.

Corporate credit spreads should remain tight as the market focuses on fundamentals and fiscal stimulus. An infrastructure bill would be positive for many industrial and cyclical businesses, while the absence of a corporate tax increase would help the cash flow and technical outlook for cor-porate credit.

A modest rise in rates could help the relative per-formance of tax-exempt municipal securities; mu-nis tend to outperform US government obligations, with less price volatility, in a rising rate environ-ment. An infrastructure plan also might include federal subsidies for issuers of taxable municipal bonds similar to the discontinued Build America Bond. This would have an incrementally positive impact for municipal market liquidity by broaden-ing the investor base of muni debt.

The US dollar could also strengthen temporarily, as it did during the first Trump Trade. Faster growth and modestly higher interest rates should attract foreign capital flows into the US, offsetting con-cerns about larger deficits.

Background

Introduction

How to invest

Scenario analysis

Fun fact: Successful candidates for president need not be excellent public speakers. Eugene McCarthy once called Jimmy Carter an “oratorical mortician.”

Tax and spending legisla-tion is difficult to enact with a divided government.

Under a Red Wave, the expected policy mix would be incrementally positive for growth and equities.

Longer-duration fixed income would likely under-perform given a Trump Trade 2.0.




While these performance patterns are similar to the initial Trump Trade, the market response is un-likely to be as powerful for a few reasons. First, the size of any tax cut and boost to infrastructure spending is unlikely to match the impact of fiscal policies unveiled in 2017–18. Second, there is a de-clining marginal benefit to additional deregulation, given what was already accomplished in Trump’s first term. Third, US-China trade tensions are at a much worse point than at the start of the first term and will have to be addressed shortly after the election. This creates a market headwind that was not present when the initial Trump Trade be-gan, which focused only on the newly elected president’s pro-growth policies.

Long-term themes in a Red WaveIn a Red Wave scenario, we would expect less risk of a tighter regulatory environment for financials, as well as a lower probability of defense spending cuts, particularly for space-related industries. We would expect a couple of longer-term investment themes to benefit as a result.

Space: The Trump administration has been sup-portive of further development in space technolo-gies, and has put plans into motion to return to the moon in the near future. The current policies are supportive of US-led space development and pri-vate sector partnerships. Should we see a Red Wave, we’d expect to see further policy support for defense spending, and view this scenario as a broad positive for the space-related industries discussed in our Longer Term Investments report “Space.”

Fintech: Under a Red Wave scenario, we would expect to see less risk of a harsher regulatory envi-ronment for banks relative to a Blue Wave out-come. A favorable regulatory environment is sup-portive of our “Fintech” longer-term investment theme. In our view, a Red Wave would decrease the risk of interchange regulation and any potential pressure from the Consumer Financial Protection Bureau. We believe this scenario would be a posi-tive driver for the card issuers and payment com-panies in the fintech space. In our view, investors would benefit by gaining exposure to select tradi-tional incumbents with a fintech strategy, comple-mented by exposure to online payment platforms and emerging industry disruptors.

The Biden TradeThere may be a widespread presumption that a Blue Wave would be negative for US equities, and other risk assets to a lesser extent. We acknowl-edge the risk, but believe that there are good rea-sons for the overall impact on risk assets to be closer to neutral. The Biden policy agenda, while still evolving, is likely to partially reverse some of the provisions of the Tax Cuts and Jobs Act.

A Democratic administration is also likely to adopt more stringent regulatory policies, especially on cli-mate change. But the former vice president’s agenda is also likely to entail additional rounds of fiscal stimulus. The expenditures would be largely deficit-financed, with higher taxes paying for some of this spending. Talk of the Trump Trade often ig-nores the critical point that the tax cuts and in-creased spending were also largely deficit-financed resulting in the significant fiscal expansion that boosted the economy.

Ultimately, the key for risk assets in a Blue Wave is whether fiscal expansion continues to stimulate growth, and whether that’s enough to offset higher corporate taxes and additional regulation. We believe it’s reasonable to expect Democrats to prioritize policies that will promote economic re-covery since the unemployment rate will likely be around 9% in the first quarter of 2021.

Background

Introduction

How to invest

Scenario analysis

US Department of Defense budgetproposals show an increasing amount ofspace spending

Source: US Department of Defense, UBS

Figure 8

Proposed fiscal year (FY) budget for space-related spending, in USD bn

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The market response to a Red Wave is unlikely to be as powerful as it was in the initial Trump Trade.

Our “Space” and “Fin-tech” longer-term invest-ment themes could benefit in a Red Wave scenario.

We believe the overall impact on risk assets would be closer to neutral in a Blue Wave.




Still, the agenda does pose a challenge to the eq-uity markets. Increasing the corporate tax rate from 21% to 28% would reduce S&P 500 earnings per share by about 5%, and higher taxes on in-come, capital gains, and dividends for the wealthy could dampen “animal spirits.” A Biden administra-tion would likely tighten regulatory standards, but as we explain below, these will likely be very tar-geted to specific industries.

As a result, we think a Blue Wave will have a roughly neutral effect on equities, though there will likely be winners and losers. Virtually all com-panies will face the prospect of higher corporate taxes. But bear in mind that tax increases could be phased in over time and higher government spending may exceed the level of tax increases. At a sector level, industrials, materials, and segments of tech and utilities could be modest beneficiaries from transportation, green, and tech infrastruc-ture spending.

By contrast, the energy sector could face some of the strongest regulatory headwinds as the admin-istration tries to move the economy away from fossil fuels—although a carbon tax or a cap-and-trade scheme seems unlikely. Financials will likely garner greater scrutiny, but we expect most of the policy changes to be focused on consumer protections rather than wholesale changes to banking regulations.

The giant tech companies are already facing regu-latory and antitrust scrutiny from both Democrats and Republicans, so a Blue Wave may not signifi-cantly alter the landscape. The push for drug price regulation may get a second wind under a Biden administration, but Democrats would still likely have to find areas of agreement with Re-publicans on this issue. The calls for “Medicare for All” have cooled over the last few months, but Democrats will likely look for ways to expand healthcare coverage by expanding Medicaid or lowering the eligibility age for Medicare. Overall, the healthcare sector might face greater uncer-tainty but we think much of this is already re-flected in current valuations, and the most dire policy outcomes look unlikely.

Investor perception and policy sequencing will af-fect how equities perform both before and after the election. Equities may struggle initially if a Blue Wave happens or looks inevitable, but should eventually recover if Democrats prioritize economic recovery, as we expect. What’s most likely is higher volatility as this story plays out before and after the election. In fact, history suggests that a change in control in the White House is often associated with higher equity market volatility (Fig. 9).

Turning to fixed income, even if tax increases aren’t implemented in 2021, investors are likely to react initially to a Blue Wave by adopting a risk-off strategy in the weeks immediately following the election. We expect corporate credit spreads to widen on the prospect of more stringent regula-tory enforcement and higher corporate taxation. However, we are inclined to believe that the effect will be temporary as expectations for further fiscal stimulus will offset investor anxiety over the impact of higher taxes on economic growth.

The performance of government securities is less likely to be affected as the Fed is still exerting a dominant influence on the fixed income market. With the US central bank likely to maintain a zero interest rate policy on the short end of the curve

Background

Introduction

How to invest

Scenario analysis

A change in control in the White House is oen associated with higher volatility

Source: Bloomberg, UBS, as of 25 June 2020

Figure 9

Annualized S&P 500 volatility two months before and aerpresidential elections, since 1950, in %

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A Biden administration may tighten regulatory standards targeted to spe-cific industries.

A change in control in the White House often brings higher volatility in equity markets.

We expect corporate credit spreads to widen in a Blue Wave, but believe the effect would be temporary.




despite an economy poised to recover from the coronavirus, we expect any movement to occur on the longer end of the curve. In effect, a steeper yield curve is in the cards regardless of who wins in November. The performance of municipal securi-ties should fare well on a relative basis in a Blue Wave due to a combination of more federal finan-cial support for states and local governments and a higher federal tax rate.

Long-term themes in a Blue WaveBiden’s climate policy aims to ensure the US achieves net zero emissions by 2050, and could provide a near-term boost for related longer-term investment themes.

Energy efficiency: Biden’s climate policy aims to improve building efficiency by ensuring all US gov-ernment installations and buildings are more energy efficient, and by calling for more aggressive build-ing and appliance efficiency standards. He intends to incentivize greater energy efficiency by helping to offset the upfront cost. In our view, companies with revenue exposure to the “Energy efficiency” longer-term investment theme should be beneficia-ries of this initiative.

Smart mobility: Biden aims to speed up the adoption of electric vehicles to aid in reducing emissions. In addition to relying on the Clean Air

Act and developing new fuel economy standards, he plans to develop 500,000 new public charging outlets by the end of 2030, and to restore the full electric vehicle tax credit. These incentives should benefit companies with exposure to the “Smart mobility” longer-term investment theme in a Blue Wave scenario.

Renewables: Biden has listed several “day one” actions via executive order should he take office. One of these intended actions is to further develop renewable energy sources on federal lands and waters, with the intention of doubling offshore wind by 2030. His broad-based goal of reducing emissions by promoting smarter grid technologies and renewable energy generation should benefit the “Renewables” longer-term investment theme.

Background

Introduction

How to invest

Scenario analysis

Did you know? A candidate has won the popular vote but lost the presidential election on five occasions in US history. Andrew Jackson lost to John Quincy Adams in 1824. Samuel Tilden lost to Rutherford B Hayes 1876. Grover Cleveland lost to Benjamin Harrison in 1888. Al Gore lost to George Bush in 2000. Hillary Clinton lost to Donald Trump in 2016.

Biden’s climate policy could provide a near-term boost for three of our longer-term investment themes.




How to invest ahead of the election

Although the November election looms large, it should not be the determining factor in construct-ing investment portfolios. In fact, the starting point in preparing portfolios for November is to take a step back and ensure you are appropriately allocated—based on your specific circumstances—in the first place. UBS Wealth Way* is a process for doing so that can help every investor find the right balance between risk management and potential wealth accumulation.

UBS Wealth Way comprises three specific strategies:

1. A Liquidity strategy to help protect your lifestyle2. A Longevity strategy to help achieve your life-

time goals3. A Legacy strategy to help impact the lives of

others

Investors without a Liquidity strategy should con-sider putting one in place in the lead up to the election. Liquidity strategies should be mainly com-posed of cash and high-quality bonds, and should be large enough to cover portfolio spending needs for a period of 3–5 years. Liquidity strategies can be spent down if (for unforeseen reasons) the elec-tion results in an extended bear market, allowing risk assets time to recover, and are part of portfolio management for many institutions. For example, David Swenson, of the Yale University endowment, calls their liquidity portfolio one of their most im-portant strategic positions. If nothing else, a good Liquidity strategy provides the barrier against ruin that enables risk-taking with the remainder of your investment assets.

In a world where safer assets yield less than infla-tion, Longevity portfolios should generally be in-vested in a way that maximizes the expected value of wealth accumulation based on the investor’s goals and objectives during their lifetime. Impor-tantly, the portfolio with the highest expected value from a wealth accumulation standpoint is not the same as the portfolio with the highest average return. Most investors will find that a well-diversi-fied growth portfolio, consisting of 50–75% risk

assets, leads to the best outcomes relative to their lifetime objectives. A full discussion of Longevity portfolio selection is beyond the scope of this sec-tion, but we suggest working with your advisor to identify the right strategy based on your situation.

Finally, Legacy portfolios can generally be allocated in a more aggressive fashion and take advantage of liquidity premiums historically experienced through private equity, private credit, and private real estate. However, at the moment the asset allocation of Legacy assets might not be as important as estate planning in the lead up to November for investors in the United States. In a Blue Wave scenario, it is possible that we will see significant changes to the Internal Revenue Code, specifically around wealth transfer and capital gains. An early start could be very valuable for some families in that regard.

Tactically investing in election outcomes

Even with a disciplined investment approach, the temptation admittedly exists to position portfolios to take advantage of, or hedge against, potential election outcomes. We caution investors against doing so at this time, but rather to be flexible to al-ter their portfolios as new information arises. For one, the election outcome is highly uncertain and positioning a portfolio right now for a specific out-come leaves it vulnerable to the good chance that another outcome, with different market conse-quences, materializes.

Instead, we recommend tactically adjusting portfo-lios to reflect the evolving outcome probabilities and the policies likely to be adopted in each. We will communicate our tactical trade guidance be-tween now and the election through our normal channels, including the UBS House View monthly publication. The implicit rationale for this approach is to maintain portfolio diversification so a single outcome doesn’t cause significant financial pain. For investors who want to own assets that could do well in a specific election outcome, such as the

*UBS Wealth Way is an approach incorporating Liquidity. Longevity. Legacy. strategies that UBS Switzerland AG, UBS AG and UBS Financial Services Inc. and our advisors can use to assist clients in exploring and pursuing their wealth management needs and goals over different timeframes. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved. All investments involve the risk of loss, including the risk of loss of the entire investment. Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability.

Background

Introduction

How to invest

Scenario analysis

UBS Wealth Way can help investors find the right portfolio balance based on their specific goals and objectives.

We believe it’s too early to bet on one particular elec-tion outcome.

We recommend maintain-ing portfolio diversification so that any one particular outcome doesn’t cause major financial pain.




Trump Trade 2.0 assets, the best way to maintain portfolio diversification is to actually also own the Biden Trade assets. That way at least one of the trades offers a hedge against the other, and its gain is likely to exceed the losses on the other trade—a good example of diversification at work.

The Trump and Biden trades described above are not simple portfolios that can easily be bought, but rather broad assessments of likely asset class performance. To get more pure exposure to these two trades, we have created lists of stocks that align with the Trump and Biden trade logic.

Implementation

Blue and Red Wave victory stock listsIn a version of this report that you can request from a UBS Advisor, we highlight companies that we be-lieve will be relative winners in the Blue and Red Wave scenarios. In a Blue Wave scenario, we high-light companies that are leveraged to infrastructure spending with a focus on green initiatives, trans-portation infrastructure, and 5G buildouts. We also highlight companies that are more insulated from an increase in corporate taxes and those that could benefit if trade tensions cool. Within healthcare, we focus on companies that could benefit from an ex-pansion of healthcare coverage.

In the Red Wave scenario, our recommendations are leveraged to infrastructure spending on trans-portation and 5G networks. Select energy and fi-nancial companies could also benefit from a “relief rally” that tighter regulations from a possible Biden administration are avoided. Within healthcare, our selections are focused on managed care companies, which also avoid the risk of changes in healthcare coverage from a potential Biden victory. We also highlight defense companies that should enjoy a more supportive backdrop in a second Trump term.

By definition, a second Trump administration would result in fewer changes to policies, so there are fewer companies in our Trump victory basket.

Investors can use these baskets in a number of ways. For those that want to take a point of view on the election outcome, investors can select some or all of the securities on the respective lists as a portion of an equity allocation within an overall portfolio. The baskets can also be implemented to-gether to hedge potential volatility from the elec-tion outcome. Notably, we believe there will be in-creased focus on infrastructure spending regardless of who wins in November, so investors could simply focus on the stocks that are in both the Biden and Trump victory baskets. Note that the prospects for infrastructure spending are higher in the Blue and Red Wave scenarios where one party has control of both Congress and the White House. A divided government might be an impedi-ment for infrastructure spending.

Campaign Warriors stock listBelow, we highlight a shorter-term theme—and the associated stock list—that looks well posi-tioned regardless of the election outcome.

While we have identified potential beneficiaries in a Blue or Red Wave scenario, we are still likely to see uncertainty remain around major policy issues throughout the campaign season. For investors looking to maintain equity exposure without add-ing significant policy or headline risk, we have put together a list of companies that, in our view, are relatively insulated from election-induced volatility relative to their peers. This list of companies can be found in our “Campaign Warriors” thematic re-port. This thematic list does not intend to benefit from a victory by either candidate, but instead aims to avoid companies with significant exposure to the potential major policy changes that will be discussed on the campaign trail.

Background

Introduction

How to invest

Scenario analysis

Investors can use our Blue and Red Wave victory stock lists to get exposure to the Trump and Biden trades.

Some companies are more exposed to policy risk than others. Our “Campaign Warriors” thematic report offers investors a list of companies that are better insulated from election-induced volatility.

For more information on our longer-term investment themes, please visit ubs.com/lti.


https://www.ubs.com/global/en/wealth-management/chief-investment-office/investment-opportunities/longer-term-investments.html

Appendix


PublisherUBS Financial Services Inc.CIO Global Wealth Management 1285 Avenue of the Americas, 8th FloorNew York, NY 10019

Authors Solita MarcelliMichael CrookTom McLoughlinDavid LefkowitzBrian RoseJason DrahoLaura Kane Matthew TormeyMichelle Laliberte

Contributors outside CIOJohn NolanJohn SavercoolShane Lieberman

EditorsMark BoehmeMary HahnAbe De Ramos

Project management John ColluraMatt SiegelHannah ReimerAllie Gorin

DesignCheryl Seligman

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