As Donald Trump puts on a show as an invincible superhero, now apparently immune to COVID-19 and happy to kiss his campaign trail audience to prove it (I think I will give that one a miss….), we are entering the final stages in the race for the White House.
How is this beginning to impact markets?
The latest polls show Joe Biden extending his lead, but past polls have been very wrong. In a recent survey of the gambling odds from eight websites the prediction is a 68% probability of a Biden victory and just a 32% chance of Trump remaining at the White House. This is generating what the press and analysts are labelling a ‘blue wave’ as the Democrats look set not just to win both houses but Congress too, in a result whereby its likely decisiveness is providing markets with confidence to begin adjusting now.
Whilst a Republican government with its reduced regulation, taxes and interference has traditionally been felt more supportive of business and indeed the narrative only a few weeks ago was one of concern over a Trump defeat and stocks poorer prospects under a Democrat regime, which is associated with extra regulation, taxes and health spending, the reality is that stock-markets have, historically, prospered more under Democratic leadership.
Analysts and market practitioners are now looking back through history to predict which US assets might fare well in this forthcoming likely political scenario, and it seems that a blue wave is in-fact pretty supportive of risky bets. Markets are now responding with a shift towards smaller capitalised companies and a favouring of value shares over growth stocks. Shares in renewable energy companies, whether solar, utilities and including electrification businesses such as car makers, are on the rise given this is a core tenet of Biden’s platform, as are consumer staples and materials stocks on the basis of improving relations with China. Conversely, healthcare could be squeezed by drug pricing regulation and old energy might suffer similarly. Bank stocks have also been rising which suggests that investors think economic growth under Biden would outweigh any additional regulation.
Treasury Bond prices, on the other hand, have edged lower as a large fiscal package is more likely under a potential Biden administration, as is the prospect of a quicker path to higher inflation both devaluing government debt.
Our portfolios are positioned for this. Our holdings in US Treasuries remains low and we have reduced our exposure to US growth stocks in favour of value companies, with a bias away from the big five technology stocks that has helped power returns to date.