Strategies before the US presidential election
Uncertainty about the U.S. presidential election could jeopardize some of this year’s popular investment strategies, according to Morgan Stanley.
Uncertainty about November’s U.S. presidential election could jeopardize some of this year’s popular investment strategies as investors begin to reduce positions, according to Morgan Stanley.
Some crowded investment strategies, such as longing the dollar against low-yielding G-10 currencies or shorting long-dated U.S. bonds, could be squeezed as investors exit ahead of the election, according to a report by strategists Matthew Hornbach and James Lord.
In their mid-year assessment dated May 31, Morgan Stanley strategists predicted that “most investors will prefer to reduce the risks in their portfolios” towards the elections, and said, “As the first investors to take action reduce their positions, macro markets may move in a way that encourages a broader group of investors to move in the same direction.”
Although long dollar positions are crowded, Hornbach and Lord still expect the currency to offer modest returns in the coming months as bond yields in the rest of the world fall faster than U.S. bond yields, adding that the rising risk premium due to the U.S. election will also be supportive for the dollar.
Meanwhile, Morgan Stanley economists Ellen Zentner, Sam Coffin, and Diego Anzoategui expect the Fed to start cutting interest rates in September and for the 10-year U.S. bond yield to finish the year at 4.10 percent — about 30 basis points lower than current levels.