No matter the outcome of the presidential election, according to BofA's Chief Investment Strategist, Michael Hartnett, 2017 will likely be a year of small absolute returns as the bank expects higher rates will collide with high bond and equity valuations, but it will be a year of big rotations "as investors shift from ZIRP winners like bonds, US, growth stocks to ZIRP losers like commodities, banks and Japan", where BofA forecasts 20,000 on Nikkei, although for that to happen the currency would have to implode in what may be a terminal loss of faith in the central bank.
Still, with all attention now focused on the key risk event until a potential December rate hike, namely the November 8 presidential election, BofA provides 8 specific election trades for the election.
In a note titled "Eight election trades for Nov 8th", Hartnett shares a variety of trade ideas, some "election-specific and some result-dependent: long VIX futures; long AUDUSD vol; long TIPS; long global E-commerce, short fast restaurants (inequality); long US materials and largecap banks (fiscal); long US small caps, short emerging markets (Trump protectionist); long gold, short EU banks (Trump geopolitics); long Mexican peso (Clinton victory)."
This is what he says:
On November 8th, the US Presidential election will take place. Below we list eight trades, all specific to the election, some applicable to whoever wins, some dependent on the election result:
Long VIX futures. It seems an obvious trade, but the election is likely to be close (see latest projected electoral college result - Chart 4). There could even be a statistical tie in the Electoral College if Trump wins FL, OH, NC, WI, IA, and Clinton wins PA, VA, CO, NV, MI, NH, arguably the most volatility-inducing event of all. VIX futures are the most liquid expression of volatility, and ahead of the first Presidential debate, the cost of a Nov’16 hedge has fallen to the 19th percentile vs. the past year.
Long AUDUSD volatility. One way to invest in a risk-off scenario in the event of a Trump victory is long AUDUSD volatility. In our most recent FMS, a Republican victory was seen as a much greater “tail risk” for markets than a Democratic win. Trump has a more protectionist stance, and has threatened import tariffs against China, a stance that would unsettle Asian FX markets. David Woo recommends buying AUDUSD volatility to hedge election uncertainty. AUDUSD volatility is correlated with quant-fund selloffs: it is a top hedge for our BofAML MAST index.
Long TIPS. Populism is on the rise across the globe and both candidates have redistributive policies targeted at raising wages and reducing inequality. This could lead to higher inflation. It could lead to stagflation. Either way, it will likely be positive for TIPS.
Long Main Street, short Wall Street. Both candidates want to boost Main Street rather than Wall Street and thus propose higher minimum wages, paid family leave and higher taxation on the rich. This would be positive for US municipal bonds (U0A0). Main Street-Wall Street pair trades: long global E-commerce (BIGECOM), short fast restaurants (BINAFCRC); long mass retailers (BRUSMASS), short luxury goods makers (SPGLGUP).
Long fiscal stimulus. Best way to leverage fiscal stimulus under either president is via infrastructure spending and defense spending. Clinton has proposed $1.65tn of additional fiscal spending and Trump has proposed $2tn, according to the justreleased Committee for a Responsible Federal Budget report; Congress-approved budgets are likely to be significantly lower. Nonetheless, the direction is clearly toward more fiscal stimulus. Long US aerospace & defense (S5AEROX), US materials (S5MATR), and large-cap banks (S5BANKX). Fiscal stimulus is the primary reason our rates strategists see higher US bond yields in 2017.
Protectionism pair-trade: anti-globalization is on the rise, and Trump has a more isolationist/protectionist agenda; our economists believe that the Trans-Pacific Partnership is at greater risk under Trump; a reduction in global trade would likely be most negative for EM and the mercantilist economies of Germany and Japan; should US protectionism lead to a bout of inflation in the US, we think US small caps would benefit from inflation and have less foreign exposure. In our view, the best protectionist pair trade: long US small caps (RTY), short emerging markets (MXEF).
Geopolitical pair-trades: a Trump win could mean lower capital flows to the US, a rise in Treasury yields, and a weaker US dollar, all of which would be positive for gold. A Trump victory would also raise expectations that populist parties in Europe in 2017 could rise to power and increase the European Union disintegration risk premium. Long gold, short European banks (SX7E).
Short USD/MXN on a Clinton victory as MXN appears 15% undervalued after better Trump polls. Long health care services (SPSIHPTR), short biotech (XNBI). Best way to leverage a Clinton win, with promised tax break for health care services versus higher pharmaceutical regulation.