Never in recent history has the world been so galvanized towards the US elections. Deep down in everyone’s mind outside of the US, many of you know who you’ll prefer to win. But in the US, it can be a totally different story. What we have witnessed over the last 4 years and especially in the last 2 years is a country that has given up independence of its prestigious institutions and on the international stage, it has set long term precedence that will be very difficult to undo. Whatever the outcome from tomorrow’s elections, the bi-partisan bickering can only get worse.
So what to watch out for and how are markets positioning themselves going into this election ?
- Put option premiums have gone up
- Vix is at elevated levels
- In times of uncertainty, equities vols tend to increase and fixed income, in particular, US treasuries vols should stabilize. But not this time
- FX is also seeing elevated vols
- Every IB are recommending strategic positioning on equities portfolio
From the above market info, the market is cautiously bullish but fear the downside. So how should you play this market ?
If you are long in a certain sector, be prepared to be a longer term investor. If you are sitting on a high percentage on cash, you can look for dips to buy into. Alternatively, you can consider the dispersion trade idea we had proposed a few weeks ago. It is agnostic to the direction of the market because it takes into account the absolute movement. Besides, the Note can be 1 year and you need not hold till maturity. Once the market increase in volatility, you can benefit from the dispersion and unwind the Note at a gain. And it works when you choose highly uncorrelated stocks into the basket.
For fixed income holders, pls shorten your portfolio duration. Curve steepening will happened and it is a matter of when. Regardless of whether Biden or Trump wins, fiscal stimulus will be passed. In the longer term, US assets may devalue if the US continues the current trajectory. The basis for such a claim stems from evidence on the current debt level the FED has built and still building, the current account and trade deficits. The FED had tried to unwind the debt stimulus in 2010 but got scared when the equity market tanked.
If you are still keen on stocks, then I suggest you take advantage of the high vols and do products like the ELN, FCN, Phoenix structures. Basically, anything that involves selling vols. Choose your entry level that you will want to buy the stock. You can get a decent yield.
Then of course on the side-lines, you can place bets on who will win the elections.
Otherwise, good luck in anticipation of winning the bet. Tomorrow, there will be a series of conference calls by multiple banks where the immediate views of the outcome will be rendered. I will be participating in 2 of them. And you will get to hear it from us because we like to share with you market intelligence.