A strategist at the world's largest wealth manager lays out 4 election-related risks that could damage investors' portfolios — and shares how to safeguard against each one now, regardless of who wins
- A UBS investing strategist for the wealthy told Business Insider about 4 election-related risks that could impair investors' portfolios.
- Among them are increasing taxes and greater regulation of the financials and energy sectors under a blue-wave outcome.
- A divided government and another leg of the US-China trade war are risks under a red-wave outcome, he said.
- He shared concrete strategies and advice on how to hedge the risks now as November looms large.
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Stocks extended their losses on Friday after the market rally came to a screeching halt on Thursday, but investors should expect to see a pickup in volatility as the November elections draw near, according to a UBS investing strategist for the wealthy.
"There are a lot of people positioning around uncertainty about the election and uncertainty about COVID-19, and both of those factors are moving quite a bit on a daily basis," said Justin Waring, an investment strategist at UBS Wealth Management Americas.
"So I'm not surprised to see a big market move when we get news especially about the durability of the expansion," he said. "We are going to see more fits and starts in the market as it starts to really buy into the story of the US recovery."
Instead of losing sleep over short-term market sell-offs, investors should be more cautious about election-related risks that could have a long-lasting impact on their portfolios.
For example, Waring views the likelihood of higher taxes under a blue wave outcome as the biggest risk for wealthy investors, especially when it comes to estate taxes.
"Right now, individual investors have a lifetime instant tax gift, an estate tax exemption of about $11.58 million, which is $23.16 million for married couples," he said. "But many of the Democratic Party leaders have proposed a policy to reduce it to $3.5 million dollars per individual which would be $7 million per married couple."
"We do think that it's possible that a Democratic administration would be able to change the estate tax retroactively to the first of January 2021," he said. "And that leaves a pretty small window for families to transfer assets to the next generation, so investors should think about if there is an opportunity to reduce their taxable estate below that new threshold in order to manage the risk."
Democratic candidate Joe Biden also proposed to raise taxes on capital gains and dividends for investors with $1 million or more of taxable income to 39.6% from the current lower rate of 22%.
Some investors might think about realizing capital gains today at the current lower rate, but Waring cautioned that investors should think twice before selling the winners in their portfolios and taking profits.
"The reason for that is that deferring capital gains is usually more valuable even if you end up paying higher tax rates in the future," he said. "Because in the meantime the dollars that you would give to the IRS today are still growing in your account as opposed to sitting in the IRS account, and that has a cumulative effect that will leave investors better off even if tax rates do go higher and stay higher over the long run."
Under a Biden administration, the financials and energy sectors are also likely to be subjected to greater regulation, but investors can hedge the risk by looking at the industrial and materials sectors, which would benefit from the Democrats' willingness for more fiscal stimulus.
Investors who wish to execute on such views can do so with the iShares Global Industrials ETF (EXI) and Materials Select Sector SPDR Fund (XLB).
Hedging against the status quo
As November looms large, the two risks are that harder to hedge are a divided government that restricts fiscal spending and the risk of another leg in the US-China trade war, Waring said.
But UBS has developed an approach for investors to hedge their own political views.
"If you are personally worried about the Republican re-election, then you might want to invest in securities that would benefit from that, it will offset your personal dismay from the election," he said.
"If you're a Republican investor and you're really worried and scared about the Democratic policies, it might make sense to invest in securities that will benefit from the policies of the blue wave administration which would at least help you financially offset any risks to your personal balance sheet."
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