How should investors react to Joe Biden's decision not to run for president again? Although Biden has recommended current Vice President Kamala Harris to his party as his successor, it is not impossible that another exponent of the Democratic Party will feel called upon to run for the highest office in the superpower.

In its latest «House View - Daily Europe», UBS's Chief Investment Office GWM assumes that volatility on the markets could increase as players first have to digest the news.

From «blue» to «red» - and back?

In recent weeks, a rotation away from «blue» and towards «red sectors» has been observed on the US stock market, writes UBS. Investors have therefore favoured companies that could benefit from a Republican election victory over those that could potentially benefit from a Democratic victory. This movement could return in the coming days.

However, the big bank also reminds its clients that experience shows that the outcome of the US elections is by no means the most important driver of returns on the financial markets as a whole. This is not even the case for the individual sectors.

Different beacons of hope

Companies that are active in the green energy or electromobility sectors, for example, are generally seen as hopefuls in the event of a Democratic victory, while the fossil fuel industry and the financial sector, for example, are among the beneficiaries of a Republican turnaround.

UBS emphasises the importance of economic data and expectations of a rate cut by the US central bank. Against this backdrop, it advises its clients against making dramatic shifts based on political expectations or preferences.

Beware of a landslide victory

Instead, it recommends holding well-diversified portfolios and examining structured investment solutions that protect capital or generate regular income.

The biggest impact on the markets is likely to be a landslide victory for one or other of the parties, i.e. if they not only win the presidency but also a majority in both chambers of Congress and can therefore implement their programme with correspondingly little resistance. UBS believes this scenario has a low probability, but nevertheless points to possible consequences.

High tariffs or high taxes

If the Republicans win, Donald Trump could be tempted to increase tariffs as much as he has announced, with serious consequences for US companies that are dependent on global supply chains. Conversely, a Democratic sweep could result in significantly higher corporate taxes, reducing the distribution pool for financial investors.

And for those investors who heed the big bank's advice but still want to put a little play money on a «political stock market», there are structured products that bet on a Democratic or Republican election victory. Bank Vontobel, for example, recently launched certificates on two corresponding share baskets.

Biden's renunciation

The starting position for such financial instruments is unlikely to have changed much for the time being with Biden's renunciation, as UBS does not expect any of the possible Democratic replacement candidates to take a stance that differs significantly from the previous course in an area relevant to investors.