These 3 trades are an investor's best bet for hedging against a split government, JPMorgan strategist says

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These 3 trades are an investor's best bet for hedging against a split government, JPMorgan strategist says
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  • Investors looking to hedge against a divided government following the 2020 elections will need to look beyond buying Treasurys, JPMorgan strategist John Normand said in a Thursday podcast.
  • While typically the top safe haven for such a scenario, yields are too low for Treasurys to serve as an effective hedge, he said.
  • Normand instead recommended investors consider "second-best hedges" including holding the dollar against emerging-market currencies and owning the yen against a range of currencies.
  • High-grade credit can also fit the strategy, he said, as "the Fed could be upsizing its asset purchases in the credit markets" should the US economic recovery stumble.
  • Visit the Business Insider homepage for more stories.

Most polls suggest former Vice President Joe Biden will win the presidential race, but markets still face the risk of a divided Congress and continued stimulus stalemate.

John Normand, head of cross-asset fundamental research at JPMorgan, sees a handful of trades serving as strong hedges against such a scenario.

With Election Day on the horizon, a Democratic sweep is the scenario most likely to bring sizeable fiscal support to the damaged US economy. Risk assets would initially rally on in the event of a blue wave and hopes for a front-loaded bill, Normand said in a podcast published Thursday.

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Yet Republicans can still filibuster a stimulus measure so long as Democrats hold fewer than 60 seats in the Senate. Any sign of a legislative holdup could quickly curb optimism and place downward pressure back on markets.

Treasurys would traditionally offer safe haven from such an outcome, but yields are too low for them to serve as effective hedges, Normand said. Investors will need to settle for "a number of second-best hedges," such as holding the dollar against emerging-market currencies and owning the yen against a range of currencies, he added.

Read more: The founder of a volatility-hedging program that gained 3,700% in the March crash says 'the opportunity is ripe' for another chaotic market event — and shares how investors can take advantage of it

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High-grade credit could also fit into a hedging strategy, the strategist said.

"If the US economy is struggling around the turn of the year because of continued fiscal impasse, the Fed could be upsizing its asset purchases in the credit markets," Normand said.

To be sure, the odds of a Democratic sweep are relatively high. Biden is set to win the presidency in 89% of hypothetical scenarios, according to poll compiler FiveThirtyEight.com. Democrats are favored to take control of the Senate in 76% of modeled scenarios.

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Investors are accordingly turning more balanced toward a potential Democrat-controlled government, according to a recent Morgan Stanley survey. While strategists initially knocked a Biden presidency for the potential tax hikes it would pursue, many now view a blue wave as the most advantageous for stocks.

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