How can traders profit from the US election result? That question has more urgency with less than a week until the US Presidential election.
Trying to profit from the US election sounds good in theory. It’s harder to do in practice, particularly in this election, which remains on a knife-edge.
Election years are historically positive for US shares, according to VanEck. The S&P500 index has risen in every election year since 1960, except for 2000 and 2008. The last three US election years were especially strong for US equities.
Many factors, of course, affect the performance of US shares, beyond election results. Drawing a correlation between US share market returns and US election results is flimsy. Also, the historical evidence shows US equities, on average, can struggle in year one or two after some US elections, according to AMP research.
Moreover, US equity markets perform better under Democratic presidential terms compared to Republican terms, with the S&P 500 gaining an average of 11.5% per annum and 7.1% per annum (across a four-year period) respectively, VanEck analysis shows.
Market forces are far more powerful than US election results anyway. Valuations of the largest US tech stocks soared under the Biden presidency, even though his administration pursued some policies that hurt US technology companies.
Many renewable stocks rallied under the Trump presidency, even though his administration focused more on fossil fuels and provided less support for renewable energy companies. Again, market forces prevailed.
The closeness of this US election further compounds uncertainty about the possible market reaction to the results. Latest polls continue to suggest a close contest some election experts say is still too hard to call. It looks like Trump is just getting his nose in front, judging by betting odds this week.
That is not necessarily bad for traders. If polls suggested the US election result was clear-cut, parts of the market most affected by the result would have rallied or fallen by now. Uncertainty surrounding this election points to more market volatility than usual after the election, particularly if Trump disputes the result.
An election result that takes day or even weeks to be finalised – a strong possibility given this race is almost a dead heat – would create even more market volatility and uncertainty.
Heightened volatility in the next few weeks could present opportunities if the market overreacts to the US election result or its aftermath.
As always with US elections, this is mostly an issue for short-term traders rather than long-term investors. Also, betting on the US election result requires having a view on which candidate will win. My money, as an investor, is on Trump, just.
That is not an endorsement of Trump or his policies, or a critique on Harris. It is simply an observation that Trump seems have more momentum in the final week of the campaign, judging by polls and betting odds.
Still, much can happen in US politics between now and election day. Harris has proved a more formidable candidate than many expected and remains a strong chance of becoming the first female US President. It’s that close.
Renewable energy and healthcare stocks could be two sectors that benefit from a Harris victory. Renewable energy, in particularly, is worth watching.
For those who believe Trump will win and want to profit from that view through global equities, here are two Trump trades to consider via ASX-listed funds.
- Betashares Global Energy Companies ETF Currency Hedged (ASX: FUEL)
Trump has showed a lot more love for fossil fuels, particularly the energy sector, than his rival. In his election speech, Trump has repeatedly used the phrase ‘drill, baby, drill’, to show his support for fossil fuels and US energy production.
If he wins the US election, reduced environmental and other regulation of fossil fuel companies could lower their costs, lead to higher production and more investment in new projects or expansion of existing ones.
The Betashares FUEL ETF tracks an index that provides exposure to 36 of the world’s largest energy stocks. Its largest holdings include Chevron Corp, Exxon Mobil Corp, Shell PLC and TotalEnergies SE, the French energy giant.
FUEL is marginally down over one year to end-September 2024. Over five years, the average annualised return is a meagre 5.8%. After a brief rally following the 2020 COVID-19 pandemic, FUEL has mostly traded sideways for the past two years.
As I have explained previously in this column, I like the medium-term term outlook for key oil producers, principally because of less investment in new or existing oil fields due to Environmental, Social and Governance (ESG) concerns. That points to future supply constraints and more support for the oil price.
Uncertain geopolitical developments in the Middle East and other areas have a big influence on the oil price and energy valuations. In the short term, a Trump victory could provide a modest tailwind for the sector.
FUEL has an annual management fee of 0.47% and is hedged for currency risk.
Chart 1: Betashares Global Energy Companies ETF Currency Hedged
Source: Google Finance
- VanEck Global Defence ETF (ASX: DFND)
A Trump victory could be good for defence stocks on a few fronts. First, Trump has historically advocated for higher defence budgets and military modernisation to counter the rising military threat of China and Russia. Second, Trump’s ‘America First’ approach, and aggressive posturing, heighten geopolitical risk and the risk of military conflict. That said, under Trump’s first presidency, the US did not engage in a new full-scale war.
If Trump wins, US tensions with China and Iran will increase. Whatever happens, the likely outcome of heightened geopolitical risk is greater military spending in advanced economies, which is good for defence company earnings.
Launched in September, VanEck’s DFND ETF was the first of a few defence ETFs to list on ASX. It’s no surprise that ETF issuers have raced to launch defence ETFs given the prospect of higher military spending and the lack of defence stocks on ASX. DFND is up 13% since its launch.
DFND offers exposure to a portfolio of listed companies involved in the military and defence industries. That includes mostly large companies in the aerospace, communications, security software and training sectors.
Global defence industry spending is expected to grow nearly 40% to US$3.1 trillion by 2030, according to research cited by VanEck. In percentage terms, growth in defence spending in 2023 was the strongest since 2009.
DFND screens out companies involved in controversial weapons manufacture, such as anti-personnel mines, cluster munitions and biological and chemical warfare – a requirement in many equity funds on ESG grounds.
DFND has an annual fee of 0.65% and is unhedged for currency movements.
Chart 1: VanEck Global Defence ETF (ASX: DFND)
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at October 30, 2024.
