Donald Trump is leading in some presidential opinion polls as markets prepare for a Republican victory in November © via REUTERS

Investors have begun to ‘Trump-proof’ their investment portfolios as the former US president leads in some opinion polls in the run-up to the November elections.

Although many fund managers say the US election may have little impact on markets, some have become more defensive, ensuring portfolios are diversified across asset classes and regions to counter the impact of a second Donald Trump presidency on trade and geopolitics.

“Trump is starting to enter the narrative as the US election approaches,” says John Roe, head of multi-asset funds at Legal & General Investment Management.

“One of the risks of a Trump victory — or clean Republican sweep of the presidency, US Senate and House of Representatives — is a global tariff,” he warns. “It is possible Trump will put a global tariff of 10 per cent on everyone and 60 per cent on Chinese goods. If there is more talk of global tariffs, then it is best to be cautious as that would create downside risks.”

The latest opinion polls show Trump leading the incumbent president Joe Biden, although many point to an extremely close race. US polling aggregation website 538, which produces an average of other surveys, had Trump on 41.5 per cent and Biden on 40.8 per cent as of April 30.

A Financial Times poll also shows Biden catching Trump as the Republican spends a large part of his time in a New York court. He is the defendant in a “hush money” case brought by prosecutors alleging that he falsified documents relating to payments made to silence porn actor Stormy Daniels.

The April Bloomberg News/Morning Consult poll found Trump leading in six of the seven US “swing” states — Pennsylvania, Wisconsin, Georgia, Arizona, Nevada and North Carolina — that are most likely to determine the presidential election in November. The only swing state where the presumptive Republican nominee trails his Democrat rival is Michigan.

Combining all seven swing states, Trump leads Biden by 6 percentage points — 49 per cent to 43 per cent, according to the Bloomberg survey, with many voters appearing unmoved by headlines over his hush money criminal trial in New York and instead raising concerns on the economy under Biden.

However, some fund managers remain nervous about Trump’s policies on trade, public spending and immigration, which they fear could fuel inflation, despite his record on the economy before the pandemic struck in his first term. The US economy and markets grew strongly before the Covid-19 crisis.

For the wealthy, Trump’s tax cutting instincts could also prove beneficial, with his campaign team promising to preserve his 2017 tax cuts, which are due to expire at the end of 2025. Still, worries persist among some investors.

“The concern with Trump is that his policies could trigger inflation and recession through global tariffs,” says Bill Blain, principal at Wind Shift Capital Advisors, an alternative asset advisory firm. “I wouldn’t say it was a big risk, but stagflation could be triggered by his policies.”

Jeff Boswell, head of alternative credit at investment group Ninety One, adds: “The risk with Trump is around the headlines. Is he going to create a trade war headline, which will lead to volatility in credit markets?”

Other concerns centre on Trump’s public spending and tax policies, which could push up US debt levels. His migration plans could also hit bond markets if they tighten the labour market, leading to a reversal of strong US economic growth and higher inflation, suggest investors.

However, many bond investors remain sanguine about the outcome of the US presidential race.

“The risk for the bond markets and the thing that keeps bond investors awake at night is not so much the politics,” says Jim Leaviss, chief investment officer of public fixed income at M&G Investments.

“Whoever wins the US presidential election out of Biden and Trump, you will have the same questions over what it means fiscally. But, perhaps for Trump, there is more of a concern. Does it mean an unlimited number of bonds will be issued as we get tax cuts? With debt to GDP [gross domestic product] going up, that might cause an accident.”

Fixed income markets have already adjusted to some of these concerns. “Bonds have begun to expect a looser fiscal policy, tariffs on some imports, and controls on immigration, if Trump was to win the election,” argues Steven Major, global head of fixed income research at HSBC.

Bar chart of Change in S&P 500 in the year prior to/following a Presidential election (%) showing Stocks have generally performed better after an election than in the run-up

And, in equity markets, many strategists remain bullish. “Regardless of the election outcome, we recommend staying fully invested in public equities, and in particular US equities,” says Matheus Dibo, managing director in Goldman Sachs’ investment strategy group. “We expect strong earnings growth will continue to support stocks.”

Indeed, history suggests equity investors should not worry about an election year. After analysing data going back to 1928, JPMorgan Private Bank found little difference in S&P 500 stock returns in election years. Stocks returned 7.5 per cent on average during election years compared with 8 per cent during non-election years, slightly weaker but still solid.

Although election years tend to be more volatile, especially in the lead-up to voting day, equities often rally once the results are announced as uncertainty fades. In the past 40 years of US elections, stocks have been higher 12 months later on average, points out JPMorgan.

Crucially, this year, markets are prepared for a Trump presidency. “Unlike in 2016, this [Trump victory] would not be a surprise and the likely policy implications are known,” notes HSBC’s Major.

Christian Nolting, global chief investment officer at DB Private Bank, agrees. “Markets are often driven by surprises,” he says, “[but], in the context of the US presidential election, what would really change in the case of a Trump administration?

“Tariffs under a Trump administration may have an impact, but the markets should be prepared for that. So from that perspective, the picture may not change much.”

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