Here's how investors should position their portfolios if a 'blue wave' materializes, according to the world's largest asset manager
- The outcome of Tuesday's election will have wide-ranging implications for investors' portfolios, BlackRock said in a note on Monday.
- With polls suggesting a greater likelihood of a "blue wave," investors should move toward a more pro-risk stance despite last week's sell-off in stocks, according to BlackRock.
- Large-cap tech stocks have fueled market gains this year, but BlackRock said investors should focus instead on smaller companies that are poised to grow.
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The world's largest money manager said investors would be wise to strategically reposition their portfolios ahead of Tuesday's presidential election.
Specifically, investors should be open to more risk while diversifying out of mega-cap technology stocks in the event that Democrats pull off an election sweep to control both houses of Congress and the White House, BlackRock strategists said in a note to clients on Monday.
"A democratic sweep outcome in the election would tip us to a more pro-risk stance overall, strengthening our conviction that a cyclical upswing will benefit risk assets over a 6- to 12-month horizon," BlackRock wrote, citing "significant financial expansion" as the main catalyst.
Accordingly, the firm suggested that investors favor smaller companies and emerging-market stocks instead of a larger stake in stocks that have fueled market growth this year, like large-cap technology companies. "A repeat" of 2020 "is unlikely in 2021," BlackRock said.
What's more, antitrust reviews could be more strenuous for large technology and pharmaceutical firms under a Biden administration, BlackRock said, adding that a boost in infrastructure spending would benefit material and industrial companies, which tend to be smaller.
"We expect a cyclical upswing over the next six to 12 months," the firm said.
Outside the US, BlackRock said, emerging-market stocks could perform strongly under a Democratic sweep because a surge in fiscal spending could help boost global growth. On top of that, "more predictable" trade and foreign policy from the US and a weaker dollar would bode well for emerging-market stocks, it said.
Still, a "blue wave" is not certain, and a divided Congress could very well materialize on Tuesday.
If Joe Biden wins and Republicans keep a majority in the Senate, more gridlock and a scaled-back fiscal stimulus deal are possible. Infrastructure spending would also likely be muted, tax rates likely would not increase, and foreign trade and policy measures would likely be more predictable. BlackRock said it expects high-quality stocks and emerging markets to perform strongly in this scenario.
A win for President Donald Trump and a divided Congress could result in no changes to regulations, a muted fiscal stimulus deal, and unpredictable foreign and trade policy measures. In this scenario, expect technology and high-quality stocks to keep performing strongly while emerging-market and European stocks underperform, BlackRock said.
And if the election is contested, investors should take advantage of a sell-off in stocks by adding to their high-conviction positions, as the uncertainty about the outcome will ultimately be resolved, BlackRock said.