Mark Mobius in the latest interaction with CNBC highlighted that if the upcoming US Presidential Election ends in a contested outcome, this could cause a dramatic fall in the stock markets. A contested outcome is likely if a candidate deemed to have lost the election refuses to concede, or if he questions the legitimacy of the results.

Speaking to CNBC in an interview, founding partner of Capital Partners Mobius said, “If that takes place, then we’re really in trouble."

The volatility is likely to pick up as we inch closer to the US elections which will be held in the first week of November. The US will conclude its 59th quadrennial on November 3, 2020.

Joe Biden and Donald Trump have emerged as the lead candidates from Democrats and Republicans, respectively. The victory of either, Donald Trump (aged 74) and Biden (aged 77), will spark bouts of volatility in the equity markets across the globe and India would not be immune to such gyrations.

Hedging is the best strategy for Indian investors because a meltdown in the stock market is not expected, irrespective of the outcome. However, the latest trend suggests that the odds have tilted towards democrats.

The upcoming US elections could bring opportunities for both traders and investors. The best way for a trader is to hedge the portfolio while long-term investors can look to buy their favourite stock on the dip, suggest experts.

“With US elections up ahead, US dollar movements and election outcome related uncertainty are key developments to watch out for. The Nifty is now trading at 18x FY22E EPS on elevated growth expectations. It has reached at a higher end of our expected range. It is advisable to take some money of the table and book profits and generate up to 10 percent cash in the portfolio,” Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities told Moneycontrol.

“Those readers who understand the derivatives and have large positions in derivative markets, I recommend them to play the volatility to their own advantage. If you are leveraged and long, hedge long trading positions by buying December 2020 put option of NIFTY 11000 strike to protect the portfolio in case of undesired volatility materializes,” he said.

What does history say?

Historical data proves that Democrats fare better for the economy, with an average growth ~100 bps higher at 3.8 percent. They are also more trade-friendly, with US imports showing an average growth of 5.8 percent vs 1.7 percent in the Republican tenure.

Corporate profits, employment, and compensation growth show relatively better growth rates under Democrats too. However, the paradox here is that owing to a more solid foundation of the economy, the inflation and interest rates are firm under Democrats, suggest experts.

If ‘middling economy and low-interest rates’ are the market positives that drive up the valuations, Republicans have an upper hand.

“Dollar is usually weaker under Republicans resulting in the outperformance of commodities over equity and emerging markets over the US. A big threat that looms from a Democratic victory is that there could be some reversal in the reduction of corporate income tax which will be negative for equity markets,” Edelweiss Professional Research said in a note.

“At the same time, however, affable trade relations could help. In the immediate near term, volatility will remain elevated until the election outcome. The historical analysis reflects that post a crisis, the first six months of a new President witnesses a contraction in equity markets of about 10 percent vs a contraction of 4 percent for Presidents that do not follow a crisis,” said the report.

Therefore, Edelweiss suggests that some market correction cannot be ruled out and one must hedge the portfolio by buying the December 2020 put option of NIFTY at the 11000 levels. To play the volatility, we recommend a Long straddle (buy NIFTY Dec 12000 CE and PE) at a spread of 800.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

First Published:Oct 19, 2020 3:42 PM IST