How to Profit from the US Election

What can investors expect from stock markets as the results of the US election roll in? And what have we learned from the Brexit vote shock to help protect our assets?

Emma Wall 8 November, 2016 | 4:28PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Morningstar Investment Management's Simon Molica.

Simon Molica: Hi, Emma.

Wall: Hi, Simon. So, we are awaiting the results from the U.S. election currently. What can investors expect from stock markets as the results roll in?

Molica: We've certainly got an exciting night ahead of us. It's been a very well publicised political campaign from both parties. I think what we've recently seen is the markets have begun to become a bit more volatile. So, the VIX index, which is the measure of volatility, has risen a little bit in the past few days.

Funny enough, it calmed down a bit as we had news from the FBI that they weren't going to prosecute Clinton. But I think we can certainly see that if it's an unfavorable result that potentially volatility would definitely pick up again. Currencies are an important one as well. If the election result is favourable and the view of investors is that the Fed could move in December because of the outcome, potentially that could support the dollar.

If it was a different outcome and Trump was to come in, then obviously, there is dollar/peso volatility that could happen, as well as there's implications potentially between the U.S. and Mexico for trade, et cetera. So, it does mean a lot for different types of asset prices absolutely.

Wall: Here in the U.K. we have experienced the result of a shock political result in the last 12 months. In the day following the Brexit vote, $2 trillion was wiped off markets globally. Should we find ourselves in that situation again tomorrow, what should investors do?

Molica: Yes, it wasn't very long ago, but it does feel like a lifetime ago. Really, what we saw was a knee-jerk reaction. A massive sell-off, then a rebound as well. And I think this really plays to the point and particularly, what Morningstar philosophy is about, let's not overreact with things. We build well-balanced portfolios with different underlying drivers to our portfolios as well. So, I think people should be very careful about reacting.

What they need to do is think about fundamental research and not just overreact to a point. And if I may give a quote from Warren Buffett, "investing is simple but it's not easy." And the crux of that really is that the basic logic of investing shouldn't be hard. It's not a hard concept.

However, the emotions and the psychology of investors actually gets in the way and sometimes we go against ourselves and we actually make it harder. And I think the idea of overreacting to a short news is something that can be bad for investors.

There's studies in the U.S. that we've done as a company which shows that if you were to miss the 10 upswing days of the last 10 years, you can actually halve your returns. So, it's very concerning if people were to be out in the market for some time just based on one result really.

Wall: And to that end, with the Brexit result, we have seen the FTSE 100 rally significantly since then. So, if you just held tight, close your eyes, switch off the TV, you would have been fine. And I suppose the other thing as well as holding your nerve to protect your portfolio would be diversification?

Molica: Yeah. We are a big believer of well-balanced diversified portfolios. And absolutely, the best situation from Brexit was to hold your nerve, not necessarily to ignore it, because we do believe in fundamental research. It's important to research into these things, but really, to move when you've got a reason to move and not just as a reaction to a binary outcome.

Wall: Simon, thank you very much.

Molica: Thanks, Emma.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Emma Wall  is former Senior International Editor for Morningstar

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