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2020 politics - increased (noise) pollution ahead

It’s a challenge to trade politics – some even say it’s impossible. But there is one truth: investors are well advised to remain on their toes in order to adjust quickly to often unpredictable political decisions. A look in the rear mirror might help investors to position their portfolio for 2020.

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The US Presidential elections will trump all other headlines this year. In the run-up to the elections, the odds for a de-escalation in the US-China trade conflict and partial, face-saving trade deals are likely to rise. But other political hotspots will get air-time too. 

Just think of the UK and the Middle East. And don’t write off the growing number of anti-government protests that have rocked nations across the globe over 2019, fired by anger over issues including corruption, inequality and a yearning for democratic choice. It is unlikely that such protests will abate in 2020. On the contrary, peak-globalisation, separatist movements, regional issues and a spoonful of populism have laid the ground for further unrest in many parts of the world.

US elections
Although we won’t know who the next President of the USA will be until 3 November this year, the election campaign will overshadow most of the political discussions. So, who would be the preferred ‘POTUS’ from an investor’s point of view?

In a recent note by our Technical Analysis team, it is stated that investors should wish for the incumbent party, the Republicans with Donald Trump, to be re-elected. Their reasoning for this is simple: while the S&P 500 Index made 12.3% on average in years when the incumbent party won the Presidential election, it lost 2% in years when the ruling party changed.

President Donald Trump is likely to try to provide some good reasons to re-elect him. One of the most likely scenarios is that he will try to secure a trade deal with China, which he could then promote as a success story in the run-up to the election. Therefore, we believe that the odds of a de-escalation and partially face-saving trade deal are rising over the coming months, which would be positive for financial markets overall and also in the overarching interests of both nations.

President Trump has good reasons to make anything possible to keep the US economy growing healthily – historically, the chances for an incumbent president to get re-elected have been highest when economic growth showed good momentum. Other factors like the ongoing (and most likely non-successful) impeachment process against him or the recent escalation of geopolitical tensions in the Middle East are, at least from that point of view, only side notes.

Healthcare
Fiercely debated during every US election campaign is the critical subject of healthcare costs – and this time will be no different.

However, during previous US presidential election campaigns, healthcare stock price weakness often represented a buying opportunity. Since 1996, global healthcare stocks have actually outperformed the broad market by an average of about 4% during the 12 months ahead of election day. So, although we expect US political and litigation risks around drugs to rise, we feel comforted by the fact that the focus of the debate will be mainly on drug pricing, which makes up only about 12% of healthcare spending in the US. 

We therefore reiterate our ‘Overweight’ rating for the sector, especially at today’s attractive valuations. We particularly like life science companies, which are generally unaffected by the numerous political proposals.

Brexit
The drama around Brexit continues to unfold. However, after the sweeping victory of the Tories in the general election in December, it looks like the UK will formally break apart from the European Union this year, likely at the end of January. Nevertheless, many uncertainties regarding future trade relationships with the UK’s main trading partners remain. From an investor’s point of view this must be seen as an opportunity too.

While our equity strategists have an ‘Underweight’ rating on the UK equity market, we believe that there is value in the currency – at least in the longer term. The British pound is undervalued against most of its peers, largely due to political factors. Once the ‘mist’ surrounding Brexit has cleared, we believe the currency is ripe for a rally, not least because of the efficient handling of capital in the UK corporate sector.

Conclusion
Rest assured that markets will be impacted by unpredictable politics at times, and it won’t be different in 2020. Indeed, it is cumbersome to trade politics. Still, for those who actively wish to invest in political uncertainty, we suggest exposure towards multi asset class solutions, able to exploit spiking volatility. Or, consider healthcare stocks: the sector regularly comes under scrutiny during US election campaigns – unwarranted we think.

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