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Pro Analysis

Morgan Stanley sends clients Trump hedge ideas as Wall Street reacts to narrowing polls

A shopper pays for pears with a 100-peso bill at a fruit stand in Mexico City.
Susana Gonzalez | Bloomberg | Getty Images
A shopper pays for pears with a 100-peso bill at a fruit stand in Mexico City.

Wall Street strategists are suddenly very busy as narrowing poll numbers in the last week have taken the consensus election opinion from a Hillary Clinton blowout to a small chance of a Donald Trump upset.

Clients want to know how to hedge against a win by the unpredictable New York businessman.

Morgan Stanley is the latest to give trades that will protect clients' portfolios from a Trump win and even allow them to profit.

"Polls may tighten more and outcome uncertainty rise, but our base case is a divided government limiting policy action to incremental tax changes and infrastructure spending," strategist Michael Zezas wrote in a note to clients Tuesday.

"However, a tighter race risks markets starting to reflect the early policy path of a Trump presidency (an 'accidental stimulus' and more trade protections). It also de-emphasizes the risks of a Democratic sweep."

Zezas cited how the final polling averages in the 1980, 2000 and 2012 elections were off by 3 percentage points or more versus the actual voting results. The current FiveThirtyEight national polls popular vote gap between the candidates is 3.7 percentage points.


Source: FiveThirtyEight

"Hence, even a slight tightening gets Trump closer to the edge of a potential normal polling error, opening a path for victory," he said.

A rising possibility of a Trump victory would mean more market volatility and boost concern over a potential change in Federal Reserve leadership, according to the firm.

To take advantage of a tightening race, here are the two trading ideas the strategist pitched to investors.