Here's How to Trade the Huge Week in Global Politics
Writer CNBC.com Asia
Political events this week in the world's two biggest economies may have had investors sitting on the sidelines, but strategists say it's not time to be overly cautious, rather, investors should resume some risk and buy equities.
Great Hall of the People, Beijing, ChinaA U.S. presidential vote takes place on Tuesday and on Thursday China's ruling Communist Party starts its 18th National Congress, ushering in a new generation of leaders that will govern for the next 10 years.
The U.S. elections are particularly significant because the results will determine first, if the economy continues to get a boost from quantitative easing (QE) under Federal Reserve Chairman Ben Bernanke and second, how the stalemate over the "fiscal cliff" of impending tax cuts and spending hikes will be resolved, says IG Markets strategist Justin Harper.
"Traders want to know who is best at dealing with the "fiscal cliff", which is both an economic and political nightmare waiting to happen," Harper said. "For many, (Republican) Mitt Romney would be good for equities, although he may want to end QE3 and replace Bernanke at the Fed."
However, if Democrat incumbent Barack Obama wins, the quantitative easing program will be continued and is likely to remain a "potent force" in helping the U.S. economy get back on its feet, Harper added.
Under Obama, the Fed has embarked on three rounds of quantitative easing, in 2009, 2010 and this September, to boost the U.S. economy and lower interest rates. Republican challenger Romney has said he does not believe the policy works.
The two candidates also cannot agree on ways to avoid the "fiscal cliff", which economists expect to push the U.S. economy into recession unless Congress acts.
(Read more: 'Fiscal Cliff': Two Candidates, Two Approaches)
While the "stakes are indeed high" this week, investors may have been too cautious, said Wellian Wiranto, investment strategist with Barclays Bank.
"Given that the elections remain too close to call, investors are likely to sit tight," he told CNBC. "Nonetheless, for long-term investors who have been overly focused on 'safe haven' assets, there may be opportunities to rotate into assets with better risk-adjusted returns, including equities."
Nick Maroutsos, managing director of fund manager Kapstream, agrees, adding that it may be time for investors to take on a little bit more risk in their portfolios.
"Once we get past that election, once we get past that fiscal cliff, I think we will have a lot more clarity on where investments can be headed over the long term," Maroutsos told CNBC Asia's "Squawk Box".
"Looking around the globe, government bonds don't really interest us. Yields are at historical lows… I think equity markets can run into 2013. We would be relatively bullish the equities sector."
Investors may want to start looking at Chinese stocks, for example, Maroutsos said.
Time to Buy Chinese Stocks?
China's once-in-a-decade transition comes against a backdrop of an economy that has slowed for the past seven quarters.
(Read more: China at a Turning Point as New Leadership Takes Over)
Xi Jinping, currently the vice-president, and Li Keqiang, currently the vice-premier, are tipped to become China's next president and premier respectively, taking over from President Hu Jintao and Vice President Wen Jiabao.
Analysts said China's new leaders would manage the transition, and economic slowdown well – a prospect that means it could be a good time to buy Chinese equities.
Chinese stocks have been the laggard of global equity markets this year, with the Shanghai Composite Index down 4 percent, while the S&P 500 has gained 12.5 percent and Hong Kong's Hang Seng Index has rallied almost 20 percent.
"We are China bulls. We remain China bulls in light of what's happening with the reduction in growth prospects," Maroutsos said.
"The (China situation) really doesn't pose much risk in our view, because the wheels have been in motion for quite some time, and you will get a situation where the new leadership that comes on board will likely maintain continuity towards the existing policies that are in place," he added.
-By CNBC's Jean Chua.