Today’s U.S. presidential election, momentous as it might be, is just the latest reminder that institutional investors are always facing geopolitical risk.
“Investing is not just about the financials and looking at the companies and the debts,” says Janet Rabovsky, a partner at Ellement Consulting Group in Toronto. “It is actually understanding, in this increasingly global world, what drives markets and investments.”
Read: What could a Trump presidency mean for Canadian institutional investors?
With the U.S. election, investors can extrapolate from the policies of both candidates, says Florian Ielpo, head of macroeconomic research at Unigestion in Geneva.
Should Republican Donald Trump win today, his ideology against globalization will put trade agreements and, therefore, investments in emerging markets at risk, says Ielpo. “If he succeeds in passing laws for the Congress, it would boil down to limiting trade with China and with Mexico, and that’s definitely not [good] policy for emerging markets.”
Read: How the U.S. election will impact currencies
If Democrat Hillary Clinton wins, on the other hand, biotechnology and health-care investments may be on the line, says Rabovsky. “[Clinton] has been a big supporter of more communal health. She supported Obamacare and all of that, and some people feel she will continue to go down the path of greater socialization and greater regulation of [these] companies, which could impact their ability to make money.
“Now, I don’t know if there’s any proof on that; this is a theory based on the policies she’s enacted. And so what you’ve seen is a large selloff in these sectors in the U.S. market in advance of that. People getting out, just in case.”
Read: Brexit vote incites volatile market, stunning global investors
Both candidates, Rabovsky adds, have been championing infrastructure development, which could mean more well-paid jobs will return to the United States and construction could be an industry to invest in. “So there’s lots of things that could happen. . . . It’s following the bouncing ball,” she says.
To hedge against the unknown, Unigestion is shifting its exposure away from fixed income. “Bonds are not offering much of a protection in political turmoil, which is why we decided not to increase our bond exposure but to decrease it,” says Ielpo, referring to historical patterns.
Unigestion is also buying stocks in the Chicago Board Options Exchange’s volatility index and was increasing its exposure to the U.S. dollar a few weeks ahead of the election, he says.
Read: Canadian pension solvency survives Brexit, for now: survey
Ielpo also notes institutional investors shouldn’t rely on polls predicting a Clinton administration, pointing to the discrepancy between anonymous online polls in advance of Britain’s vote on whether to leave the European Union and the result in June.
“The thing is that voting for Brexit was seen as a way of saying no to globalization, if not no to migrants, which is not really something you can say out loud in the streets, especially in the case of the U.K.,” he says, adding some people may lie to pollsters if they feel they would judge their pro-Trump opinions harshly. “The beauty of it is when you’re alone and about to vote, nobody’s watching what you’re doing.”