Investing.com -- Citi analysts said in a note Tuesday that investors should focus on policy expectations amid heightened uncertainty surrounding the U.S. election.
As major stock indexes remain volatile, Citi notes that many moves in U.S. equities are challenging to directly attribute to election outcomes, especially with difficult-to-call House and Senate races.
Other asset classes like rates, currency, and gold have shown clearer, election-related trends, with shifts that more readily align with the potential of a Trump victory or Republican sweep, according to the bank.
Citi analysts emphasize the importance of understanding the "perceived policy paths" that each candidate might take, as this will ultimately provide clarity on fundamental market impacts.
They suggest that investors should be cautious of reacting to initial market fluctuations, as these are likely to reflect perceptions rather than concrete policy outcomes.
"Only policy clarity will really give market participants the tools to assess fundamental impacts," says the bank.
Citi highlights that both a Republican or Democratic sweep would likely present downside risks for U.S. equities. However, they see an opportunity in "relative trades" to identify sectors that could be seen as winners or losers based on market adjustments to political developments.
The bank lists sectors that could be sensitive to political shifts, including energy, financials, and clean energy, with particular attention to expected changes in regulation, inflation, trade policies, and tax rates.
In the near term, Citi suggests a cautious approach: "We would be short-term sellers of red s