Investors more concerned with inflation and Fed rate than US elections
Institutional investors view a Fed rate rise as the biggest threat to their investment portfolios, according to the findings of the latest Risk Rotation Index by NN Investment Partners , conducted in October, in the midst of an unprecedentedly intense presidential race.
A Fed rate increase is regarded by 44% of respondents as a “significant” risk for their portfolios. This was closely followed by inflation (43%), with the US elections taking third place (38%). Other important risks are an emerging market crisis (35%) and Brexit (29%). In contrast, our previous Risk Rotation survey in August showed that at that time professional investors still considered Brexit the most significant threat.
An overwhelming 84% of respondents expect a Clinton victory on 8 November. Only 12% believe that it is too close to call while only 2% believe Trump will prevail and 2% have no opinion. The survey figures may explain why the election is not seen as the biggest potential threat for investment assets. Many investors are counting on a Clinton presidency, which is widely expected not to have a big impact on financial markets.
Nonetheless, the outcome of the US elections remains uncertain and one cannot rule out a Trump victory. In addition, the outcome of the House and Senate races will be an important determinant of the next president’s scope for policy change.
Only 6% of respondents believe that a Trump presidency would have a positive effect on global equity markets. Another 84% predict a negative impact, with 45% claiming that it would be even “hugely negative”. Conversely, 58% of respondents believe that a Clinton presidency would have a positive effect on global equity markets while only 8% expect it to have a negative impact.
When looking at US equities over the coming 6 to 12 months, 12% of respondents expect a Trump presidency to have a positive effect, compared to 55% who expect a Clinton presidency to have favourable effects.
A Clinton victory is the base case for most investors. It should lead to continuity and a renewed focus on the encouraging economic and corporate fundamentals. A relief rally is very well possible in this case. But as the Brexit vote taught us, polls must not be taken for granted. Investors need to be prepared and hedge for the alternative outcome, which, if it occurs, may lead to an initial sell-off in risky assets, especially in emerging markets.”
Over the past six months appetite for risk has risen by a net 3.9%. Some 31% of investors say that they have increased their appetite, compared with 27% who said they had decreased appetite for risk. This rise in net risk appetite follows a fall of 7.2% in August. However, only 4% of investors said they had “significantly” increased their risk, compared with 9% who said they had significantly reduced it.
Patrick Moonen, principal strategist Multi-Asset at NN Investment Partners