Here's why a 34-year industry veteran has 'zero allocation' to gold for his $1.3 trillion asset manager employer ahead of the US election. He pinpoints 3 better ways to hedge against a contested result.

  • Global head of asset allocation research for Invesco, Paul Jackson, breaks down his best- and worst-case US election scenarios for investors detailing the impact on various assets, including why investors should be particularly cautious about gold.
  • He provides analysis on why a Democratic sweep would not be as bad an outcome for the stock market as most investors think.
  • "I don't buy the argument that a Biden victory would be bad for equities," Jackson said.
  • "In my model asset allocation, at the moment I have zero allocation in gold, I did have an overweight allocation earlier in the pandemic process, but now we're zero," Jackson said. "Exactly because gold has done what you would have hoped for. And consequently, is now quite expensive."
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"Just to put my cards on the table, I don't think politics usually is that important for financial markets," said Invesco's global head of asset allocation research, Paul Jackson.

Working for one of the UK's largest asset managers, with over $1.3 trillion assets under management, Jackson provides commentary and analysis on macroeconomic events for the firm, highlighting the potential impact of macroeconomic events on capital markets.

"We make a big thing about it around the time of elections," Jackson said. "But I don't think over the course of a number of years it makes a massive difference. So I think clarity would be good and uncertainty about the outcome would be bad."

Despite being skeptical about the long-term impact of election results on financial markets, Jackson's 34 years of experience in the industry enables him to provide insight into how financial markets are likely to respond to the US election in the short-and-medium term.

With less than a week till the election, Jackson tells Business Insider what he sees as the best and worst US election scenarios for investors and the impact on various asset classes.

Best case scenario

"I don't buy the argument that a Biden victory would be bad for equities," Jackson said." In the short term, it may be. But I think the markets have gotten used to the fact that he's the most likely victor … I think that is the best outcome because it clears the way for a clear legislative mandate."

Jackson references data from 1853,  the date from which the United States has had either a Democrat or Republican in the White House, to show that  stock market returns have typically been better under Democratic presidents.

"So despite all of the angst and the hand-wringing, at the end of the day, there's nothing in the history of it that tells me that having a Democrat in the White House is going to be bad for the stock market," Jackson said. "And indeed, when you break down those presidential periods, if you look at the periods when you've had a Democratic president, along with a kind of a strong Democratic Congress, those are not periods where you get poor stock market returns.

"So I am maybe a little more relaxed than most people about the prospect of a Democrat clean sweep," Jackson said.

In terms of assets impacted in a Democratic sweep, Jackson expects assets such as ESG to do well, whereas oil and gas and pharmaceuticals could be impacted based on Biden's policies on the environment and healthcare.

One asset that could be significantly impacted is gold.

Jackson has an econometric model of gold where the price is determined by real Treasury yields, inflation expectations built into the bond market and the trade-weighted dollar. 

On the day after the 2016 election, the price of gold went to a significant premium within the model. He found through the model that President Donald Trump added around $200 to the price of an ounce of gold. 

And so although the equity markets continued on an upward path following the election results, Jackson believes a sufficient number of investors were also concerned about the geopolitical implications.

"So the rising risk premia really manifested itself in a boost to the price of gold," Jackson said. "Now, I'm assuming that a Biden victory and a clear Biden victory, would bring us back to a US that would interact with the world in a more traditional way. I think that would dampen risk premia, and that may well depress the price of gold."

A Biden victory is expected to generate a more stable relationship between the US and China, Jackson said. However, he does not expect Joe Biden to give China a "free ride". In fact, he expects Biden to potentially build a coalition rather than do things himself like President Donald Trump. This could result in a shift back toward a traditional approach to geopolitics.

Worst case scenario

On the other hand, a contested election is Jackson's worst-case scenario because it's likely to create uncertainty.

"I think it might be worse [than 2000] this time because of the social divisions within the US," Jackson said.

This outcome would likely be good for assets, such as gold and the Japanese yen, and negative for risk assets, such as equities and real estate — assets with high yields.

However, with gold prices so high, Jackson advises investors to act with caution. In the short-term being positioned in gold could be advantageous. However, if the contested outcome results in a Biden victory then we could see the depression in the price of gold, similar to the Democratic sweep scenario.

"Personally, I would be very hesitant about big positions in gold," Jackson said. "And in my model asset allocation, at the moment I have zero allocation in gold, I did have an overweight allocation earlier in the pandemic process, but now we're zero. Exactly because gold has done what you would have hoped for. And consequently, is now quite expensive."

Alternatives to gold could be silver, because the ratio of gold to silver is out of line with historical norms, Jackson said. Investors could also look to currencies like the Japanese yen or the Swiss franc.

But ultimately  investors should remember that in the long-term election results "don't make a massive difference to financial markets."

Get the latest Gold price here.

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