Clearwater Analytics: US election uncertainty putting portfolio risk front of mind

5 november 2024

By Colin Clunie, Head of EMEA Operations, Clearwater Analytics 

Today's US Presidential Election is predicted to be one of the tightest in history, with the incredibly close polling figures reminiscent of the previous two election cycles. While they are currently indicating a slight lead for Donald Trump in several key swing states, the race remains highly competitive. For investors craving certainty, this is a nightmare. The situation puts portfolio risk front of mind, as they seek to ensure that they are protected from potential volatility due to the result, while equally being able to take advantage of the markets depending on the successful candidate’s policies.

The very different approaches that each candidate is expected to take from a fiscal perspective are referred to in recent analysis from the Committee for a Responsible Federal Budget, a non-partisan group in Washington. This report suggests that if successful, Trump would raise US debt by twice as much as his opponent, Kamala Harris. Equally, they take very different views on areas such as green investing, where Trump is an established sceptic.  

These factors mean that markets are likely to react very differently, depending on which candidate is successful. On top of that, there are very few markets globally that are not impacted by what goes on in the US given its importance to the global economy. For this reason, investment managers need to have the ability to be reactive to developments as the votes are counted, and ready to answer client enquiries on how their portfolios may be impacted. This means an investment manager needs to be able to rely on an accurate, up-to-date overview of their entire portfolio, including an in-depth understanding of their own risk exposures to the different scenarios and potential results.  

Of course, savvy investment managers will have considered their portfolios in advance of the election result, having assessed their investment strategies proactively to manage potential market risks associated with either candidate. However, the aftermath of the election is still likely to lead to volatility in certain markets, and being able to rely on an accurate, up-to-date overview of an entire portfolio, including a clear understanding of the risk exposures of different assets can only help those on the buy-side.  

The issue for those who are not able to do this is being thrown into the spotlight in this election, more than others, for two reasons. Firstly, it is an incredibly tight race, one that is currently too close to call, and will likely remain this way until all of the votes are counted. But crucially, investment managers have increasingly diversified their investing strategies compared to previous years. If we compare the 2024 election to the 2000 election, which saw George Bush Jr face off against Al Gore in a notoriously close-run affair, the types of assets and financial instruments used by investment managers has expanded dramatically.  

This cannot be overlooked, as it means that investors are likely to be exposed to the election result in more complex ways than previously, not just through their direct holdings of US Treasuries or particular listed US equities. The difficulty that has been created for investment managers in this period is directly related to the operational complexity associated with many of these assets, such as private market or alternative assets. They have very different kinds of data underpinning them, and often, investment managers will have this information scattered across their organization in different spreadsheets and systems.. This makes it nearly impossible to achieve a clear, comprehensive view across all assets, which can aid time-pressed strategic decision making.  

If investment managers have the ability to standardise and centralise all of these different types and sources of data, it helps across the entire business. It supports the investment teams in ensuring they are not left behind as markets react to the latest exit poll, provides consistent information for reporting teams to relay to their clients to assuage their concerns, and allows for a better understanding of the risk exposures that different assets may have to the possible outcomes.  

This extremely tight US Presidential race is bringing the quality of information that investment managers are able to rely on back to the surface. As they nervously prepare for two very different scenarios on and after November 5^th, it is those who can rely on a single, clear and comprehensive view of their portfolio holdings that will be better able to manage their investment strategies, client relationships, and risk levels.