Written By: Susan Smithfield – Corporate Finance
Controversial real-estate-investor-turned-politician Donald Trump has formally been endorsed as the Republican Party nominee for US president. But even before his coronation at the Cleveland Republican National Convention, Mr. Trump had already appeared to be narrowing Hillary Clinton’s lead in some key battleground states.
What do you do with your portfolio now that Trump is increasingly looming large? Experts say you are better off hedging your portfolio. Perhaps not just because of Trump’s formal endorsement by the GOP to run for president, but also because the outcome of the 2016 presidential election is becoming increasingly uncertain.
Both Mr. Trump and Mrs. Clinton have given investors reasons to worry. Trump is on record for his controversial proposal to bring Canada and Mexico back to the negotiations table over the North American Free Trade Agreement. Then there is also his proposal to slap goods imported into the US from China with heavy tariffs. But Clinton has insisted that drug prices have to come down. Questions have been raised that if forcing pharmaceuticals to price their drugs lower would hurt their ability to research better treatments. Investors in pharmaceuticals stocks are feeling scared, but they are not the only ones.
Fear is spreading among investors everywhere about what would happen to their investments if Trump wins the November 8 election. It is no wonder that investors are selling out of equities and keeping their investments in cash, causing cash levels to rise to a 15-year high.
Leave nothing to chance
Investment experts are already urging investors to hedge their investments against a Trump victory in the November 8 election. The Republican nominee’s campaign has created much uncertainty for the markets, and investors cannot afford to leave anything to chance as the candidate appears to be catching up with Clinton in key states. Experts claim that investors can take advantage of options to hedge against the election’s uncertainties.
Interest in options
Regarding options trading, prices of options are still low, which experts say is indicative of the moderate interest in options. But things are not likely to remain the same forever, especially now with Trump being endorsed by the GOP. In other words, interest in options is likely to soar as the November 8 election date approaches.
It turns out that market forecasters are finding it difficult to predict the outcome of the 2016 presidential election. The formal endorsement of Donald Trump by the Republican National Committee has added to the uncertainty that already exists among investors. It is worth pointing out that some investors had hoped that Trump might miss the GOP presidential nominee ticket. In the lead-up to the GOP Convention, some Republicans had lobbied to shortchange Trump on the convention floor by changing the rules of the game to throw open the contest for the GOP presidential nominee ticket. But those efforts fell flat.
The stunning decision by the UK to peel off from the European Union in the so-called Brexit vote has made election and market forecasters more wary about their predictions regarding the US elections. In the Brexit vote, most polls showed the Remain camp leading until the actual results were announced, and the outcome was so surprising that the Conservative Party leader and prime minister, David Cameron, decided to resign. With that in mind, polls showing Clinton in the lead are no guarantee that Trump will be blocked from going to the White House. Analysts are worried that Trump could pull a Brexit-like surprise and put investments at risk.
Analysts say that markets typically dislike uncertainties, but uncertainties have been in plentiful supply this US election season. As such, to hedge against election uncertainties, investors considering holding onto their stocks may have to buy puts. But those who want to exit their stocks can buy calls. If the VIX is any indicator (it is below 15), it turns out that the options that investors buy going into the elections will be what saves them money.
However, when it comes to hedging stock portfolios with puts, experts say timing will greatly matter. Put options increase in value as stocks decline.
Standing in battleground states
A recent poll released by NBC News/Wall Street Journal/Marist shows Trump and Clinton going neck-to-neck in Iowa and Ohio. The poll was released before Trump bagged the GOP nomination for president. But another poll released around the same time as the one for Iowa and Ohio showed Hillary Clinton strongly leading in Florida, North Carolina and Colorado—up to 8 percent ahead of rival Donald Trump.
Trump’s selection of Indiana Governor Mike Pence for vice president is seen as a move that has made his campaign more “presidential”. But it has only further deepened market uncertainty because it indicates that Trump is edging closer to a win, as his selection of Pence gives more credibility to his campaign.