ElectionWatch: How to invest | UBS Global
UBS Wealth Management believes the Russian invasion of Ukraine shattered the post-war consensus that international borders are static. The resulting geopolitical uncertainty is expected to linger for months and could be more significant than the November result, given the likely limited political implications of the election.
With these considerations in mind, we believe investors wondering how to navigate an election year should stay focused on the Fed and fundamentals, consider winners in the political environment despite traffic jams, and be prepared to manage volatility. .
Stay focused on the fundamentals
The war in Ukraine has further fueled inflationary pressures, but we believe that most companies will be able to pass on higher costs to their customers. The war has also shaken US consumer confidence, but Europe is more directly affected by rising energy prices due to its dependence on Russian energy. Still, an economic slowdown in Europe is unlikely to derail U.S. earnings growth overall, as only 14% of S&P 500 sales come from Europe, as our report shows, “ S&P 500 earnings: resilient(April 13, 2022).
The Fed remains the main driver of the markets as it continues an unusually aggressive series of rate hikes in a belated attempt to reduce inflation. Overall, we expect equity markets to remain range-bound until investors have more clarity on the degree of Fed policy tightening and its impact on economic growth. Given our position in the economic cycle, we currently advise equity investors to hold a balanced exposure between defensives, such as healthcare, and cyclicals, such as the energy sector.
Fixed income assets have also suffered as the pace of future rate hikes becomes more apparent. After months of relatively poor performance, we believe that preferred securities now offer an attractive entry point.
Similarly, after three months of poor performance, tax-exempt municipal bonds are now trading at more attractive ratios relative to US Treasuries. Mutual fund outflows are expected to continue for a few more weeks, hampering performance. However, we expect market technicals, including seasonal redemptions and lower valuations relative to taxable paper, to increase investor appetite and provide a good entry point for investors by beginning of summer. For more information, please see the ” City Market Guide” (April 14, 2022).
Consider the winners of politics
The likely stalemate scenario means that specific policy beneficiaries in the medium term will be limited. That said, we see some pockets of opportunity that should benefit from the political environment.
Although the total amount of defense spending authorized by Congress may vary slightly depending on its composition, we believe that we have entered a new era of security after the Russian invasion of Ukraine. The focus on security for public and private decision makers is expected to drive increased spending on conventional defense, cyber, energy, food and semiconductor supplies. As detailed in our “Security Takes Center Stage” report, some companies will be on the verge of benefiting. We also point out that the already passed bipartisan infrastructure bill has yet to be fully integrated into some areas of the stock market, and some companies in our Rebound in Business Spending theme are yet to benefit.
The midterm elections are just one more factor that will add to an already uncertain environment in 2022. With markets likely to be choppy at least for the rest of the year, we believe this is a critical time. for investors to review their broader needs and goals in context. of our Liquidity. Longevity. Legacy. frame. Specifically, by setting aside a liquidity strategy to fund the next 3-5 years of portfolio spending, investors can have confidence that short-term spending needs will be met even if markets sell off, which can help avoid making panicked decisions that can destroy wealth and disrupt your ability to stay on track to achieve your financial goals. The liquidity strategy should be comprised of resources that can preserve capital for spending needs during down markets, such as cash, credit-limited bonds, and reserved borrowing capacity.
To learn more, please see the full report: ElectionWatch: 2022 US midterm elections, published April 22, 2022. The report includes insights on the impact of this election on the market, how to invest ahead of it, and even more.
This content is a product of UBS’s US Office of Public Policy and UBS’s Chief Investment Office.
3L Disclaimer: Times may vary. Strategies are subject to each client’s goals, objectives and relevance. This approach is not a promise or guarantee that wealth, or financial results, can or will be achieved.