Lombard Odier and other wealth managers, discuss the impact of the midterms on financial markets and asset allocation.

The Democrats' victory in the Congressional elections, taking control of the House of Representatives and Senate, is a net positive for financial markets, Michael Strobaek, global chief investment officer (CIO) of Siwtzerland’s Bank Lombard Odier has said as he and other wealth managers digested the results of this week's political upheaval.

Although major US stock futures initially fell on the news that broke in the early hours of Wednesday morning in Asia, they later reversed course to turn positive. Futures rose 1.75 per cent while S&P 500 futures rose 0.8 per cent. US Treasuries rallied, sending the benchmark 10-year yield down to 4.91 per cent. Even so, safe havens such as gold benefited: the yellow metal rose by about 3 per cent.

Strobaek said US President Donald Trump's policies have been disruptive for financial markets and the economy. He highlighted the negative impact of the so-called “Liberation Day” and the imposition of import tariffs which turned out to be “separation.” “Bond yields after mid-term elections also tend to trend downwards,” he said. He has added to duration and believes the path of longer-term yields is on the way down.

Strobaek said that what drove yields upwards was their [the Republicans] election promise not to engage in military conflict in the Middle East which they broke. “The two years have shown that they failed spectacularly on reducing the cost of living and affordability in the US. Inflation and oil prices break governments and democracies and this is what we are seeing now. We do believe yields are on the path downwards,” Strobaek said.

He also thinks that the US mid-terms uncertainty will give way to more upside in equity markets. He keeps a pro-risk stance in portfolios.

“On AI, the Democrats may push to scale back tax incentives, shift more grid costs onto developers, and introduce early safety regulations,” Strobaek continued. He sees little risk of stringent measures, such as a federal moratorium on data centers, which would likely face an immediate veto. Some self-supervised regulation remains the likely path in his view.

Data centers, AI
Strobaek's  stance was shared by Paul Gooden, head of natural resources at Ninety One. “The Democrats win likely slows the rollout of AI (increased planning/environmental scrutiny) which would be a headwind for the copper demand. However, we still anticipate that most of the data centers will eventually get built, given the geopolitical stakes vs China,” Gooden said.

Mathieu Racheter, head of equity strategy research at Swiss private bank Julius Baer, believes that the policy implications are more favorable for clean energy and more challenging for artificial intelligence and information technology, banks, and oil and gas, while the impact on healthcare is mixed. “While US politics will continue to influence markets globally, rising domestic policy uncertainty strengthens the case for international diversification through a broader mix of earnings drivers, valuations, and sector exposures,” Racheter said.

Hetal Mehta, chief economist at UK wealth manager St James's Place also believes that while high energy prices and concerns about supply security will remain important, the traditional oil and gas energy sector could face greater uncertainty. “Democrats will likely seek tighter environmental controls while reducing support for fossil fuels. The renewable energy industry could benefit from a more sympathetic Congress,” Mehta said.

The result gives Democrats control of Congress, constraining the administration’s legislative agenda for the remainder of its term. “The result reduces the administration’s ability to advance its domestic agenda through Congress. Further fiscal expansion is now less likely, while spending, taxation and major regulatory initiatives will face greater scrutiny,” Andrew Jackson, head of investments at Vontobel, said. However, given the extensive use of presidential executive orders, the Democrats’ majority in Congress could also only have a limited impact on the US economic policy.

Mark Haefele, chief investment officer at UBS Global Wealth Management, sees a more definitive Democratic outcome driving near-term volatility, particularly in tech and other areas sensitive to greater regulatory scrutiny. However, Haefele does not think the result will change the medium-term fundamental outlook sufficiently to justify an immediate strategic shift in portfolios.

Haefele advises investors to actively look at reducing single-name concentration, rebalancing oversized technology exposure, and, within technology, tilting toward quality companies across the AI value chain. “Periods of politically-driven weakness can be used to rebalance or build exposure gradually, rather than to abandon long-term positions indiscriminately,” he said.

Haefele also sees attractive income and diversification potential in high-quality bonds, particularly short- to medium-term maturities. “Investors can use volatility to rebalance or build exposure gradually, adjusting portfolios only if policy changes materially alter the fundamental outlook. Current yields offer attractive income, although persistent deficits and heavy issuance underpin our caution towards the longest maturities,” he said.

On gold, Nitesh Shah, head of commodities and investment strategists, Europe at WisdomTree believes that the yellow metal’s move back above $4,000 reflects a more supportive macro backdrop following Democratic gains in the US midterms. A weaker dollar and falling Treasury yields, including real yields, are easing two key headwinds. “The prospect of political gridlock adds uncertainty over US policymaking, while stalled negotiations with Iran and the risk of renewed military action reinforce gold’s appeal as a portfolio hedge,” Shah said.

Asset allocation in detail
Strobaek is overweight in equities and keeps an overweight allocation to developed and emerging market equities. Within developed markets, he remains overweight in Japanese stocks and underweight in UK stocks. Strobaek has raised US equities to overweight from neutral and lowered European equities from neutral to underweight. In emerging markets, he prefers South Korea, Taiwan, Brazil and China. He has added IT to his favored sectors, alongside healthcare, materials, utilities and financials. Consumer staples remain his least preferred option.

Strobaek is overweight in fixed income. He maintains his overweight exposures to emerging market bonds in hard currency and a neutral allocation to global government bonds, favoring five- to seven-year maturities in the US, UK, eurozone, Switzerland and Australia. He keeps an overweight position in UK gilts in sterling-denominated portfolios. In credit, he is neutral on high-yield and investment grade bonds.

Strobaek maintains a neutral exposure to gold. He has upgraded his view on the US dollar against developed market currencies from neutral to positive and downgraded his outlook on the euro to negative. He believes that the dollar should remain supported against lower yielding major currencies, particularly the euro. He has shifted from a positive to a neutral view on emerging market currencies. See more here about the US mid-terms.