Which areas are fund managers seeking to profit from and which areas will they steer clear of after Joe Biden’s victory?
It took a while but barring legal shocks, we now know that Joe Biden will be the next president of the United States. The political roller-coaster ride may yet have twists and turns, but Biden is now recognised domestically and internationally as the president-elect. And for investors, thoughts are now turning to what a Biden presidency might mean for them.
At a global level, stock markets have responded strongly as the US closes in on the end to the impasse. Reduced uncertainty always boosts markets, but there is also a view that the president-elect’s dealings with key global trade partners – including China – will be less bellicose than Donald Trump’s. With international trade tensions preoccupying markets for much of the past four years, that prospect offers succour.
In the US, market reaction to the uncertainties of recent days highlights just what is at stake. In the run-up to election day, when the consensus view – supported by polling data – was that Biden and his Democrats would sweep all before them, markets priced in a so-called blue wave.
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Yields on US government bonds, for example, rose by nearly 20 basis points in the days before the election – a dramatic move given that US Treasuries are yielding well below 1% – on Biden’s promise of another fiscal stimulus to support the US economy amid the Covid-19 pandemic and his flagship pledge of a $2 trillion (£1.5 trillion) investment in clean energy and green infrastructure. More government borrowing equals more inflation, bond markets figured.
On the equity market, technology stocks – so buoyant this year – suffered during the campaign, with Biden having suggested that he will tax and regulate the sector more robustly – not least through greater international cooperation. Healthcare stocks took a similar hit on the Democrats’ plans for reforms including new curbs on drug pricing.
Then the election votes began to come in, and the blue wave appeared to have faltered.
Bond yields fell 15 basis points on Wednesday 5 November, with investors calculating that while Biden was still on course to win, he would not have sufficient political support for ambitious fiscal programmes. Shares in Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL) rose 8% and 6%, respectively, on the day as investors decided the Democrats might not be able to tax them more heavily after all. The Nasdaq index jumped 4%.
Thursday (6 November) brought a different perspective, as Biden’s mail-in votes began to stack up and – even more significantly – the race for the US Senate shifted in Georgia. With both the state’s senators now facing a run-off in January, the Democrats have an outside chance of taking control of the Senate; with the House of Representatives in their control too, Biden may have more room for manoeuvre than initially thought. Bond yields spiked higher, while equity prices slipped back.
Political stalemate may suit markets
So where does that leave us? Well, first, we should recognise that the most likely outcome now is a political stalemate, with Biden taking the presidency but the Republicans maintaining control of the Senate. In fact, that might suit markets very well: while investors will be glad to see the back of President Trump’s belligerent foreign policy, they will also be relieved that the new president may not be able to push through the corporate tax increases he had promised.
Looking beyond the bigger picture, there will be opportunities for investors, suggests Fran Radano, manager of the North American Income investment trust (LSE:NAIT), one of interactive investor’s Super 60 choices. He says: “Our long-term preference is always for high-value cash-generative businesses, but we can use short-term dislocations like the current environment to support those aims.”
Radano points to two particular areas of the market where he currently sees opportunities. First, the shackles seemingly placed on healthcare stocks in the run-up to the election will eventually break, suggests Radano, for whom AbbVie (NYSE:ABBV) and Bristol-Myers Squibb (NYSE:BMY) are leading holdings. He feels similarly about the defence sector – Lockheed Martin is a top 10 holding for the trust – which has suffered because Biden is not expected to favour the industry with spending largesse.
“To be able to buy companies of this quality at these prices because of politics is an unusual opportunity,” Radano says. “These are businesses with terrific franchises, and we feel very comfortable with them even under a Democrat administration.”
Radano’s calculation is that a Biden presidency – particularly if it is at loggerheads with Congress – will do the damage to defence or healthcare that valuations in these sectors currently implies.
The flip side to that argument is that the new president may struggle to support those industries that had been hoping for a fillip from the Democrats. “We would still expect some modest measures to be agreed – particularly regarding sectors which continue to be affected by the second wave of Covid-19, such as airlines and segments of the hospitality industry,” says Mark Dowding, chief investment officer at BlueBay Asset Management.
“However, this is likely to fall well short of the multi-trillion spending plans that the Democrats had been keen to enact had they held control over all three branches of the executive.”
Consumer-facing sectors will benefit from Biden
In that scenario, Covid-susceptible stocks in consumer-facing sectors will benefit, with Congress allowing the new president to offer some support. But the big themes that might have been expected to characterise Biden’s term of office – in particular, support for green energy and transport initiatives – are less likely to shine bright.
That said, Zehrid Osmani, portfolio manager of the Martin Currie Global Portfolio (LSE:MNP), points out that both the Republicans and Democrats had made promises on infrastructure prior to the election. While Biden’s programme was more front-loaded in its spending commitment – and more focused on decarbonisation – the fact that President Trump was also planning infrastructure investment to boost the economy may enable the new president to make some progress in this area.
“We’re well positioned in terms of companies in the industrial space that will benefit from construction spend,” says Osmani. “We’re also doing some work on beneficiaries of green energy initiatives, which could be interesting as a long-term structural trend.”
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By contrast, Osmani says that his trust has no exposure to energy and to polluting utilities, where the next administration may pull back from support – particularly if, as expected, Biden moves quickly to rejoin the Paris agreement on climate change. The counterargument here, is that having gained the presidency with the support of rust-belt states such as Michigan and Wisconsin, Biden will want to support the industrial heartland of the US – particularly with mid-term elections only two years away that might offer greater potential for the Democrats to take full control of government.
Similar calculations may see Biden back away from healthcare reforms that are far from universally popular, despite previous promises to widen Obamacare. That is likely to ease the pressure on big pharma, which will feel less heat on drug pricing, while medical technology businesses – biotechs and other drug developers – are still likely to get a lift from increased healthcare spending overall, particularly in the wake of big pharma.
As for big tech, the question for Biden is whether he wants a confrontation. One factor might be the willingness of Republicans to support a showdown, particularly given the bitterness in some quarters over how some social media companies have chosen to censure President Trump’s comments in recent days; even before the campaign, some Republicans took an increasingly hostile view of the sector. Might the new president find support for an attack on the dominant market position and low tax bills of Silicon Valley’s leaders?
Maybe, but North American Income's Fran Radano thinks Facebook, Amazon (NASDAQ:AMZN) and the rest will not be too concerned. He says: “Modest regulation and tax increases are perfectly manageable for these businesses given their formidable free cash flows. This is really going to a valuation calculation, rather than anything more significant.” Some analysts may adjust their forecasts down, Radano suggests, but this will be at the margins.
We will see. With two months still to go until the next president is inaugurated – and every prospect of litigation in the meantime – it would take a brave investor to make big bets on any outcome just now. The politics may yet have more surprises to throw at us; in which case, so will the markets.
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