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Despite the derision US president Donald Trump attracts, there are pluses and minuses to his departure from the White House next January for local superannuation investors.
On the positive side, Trump’s tax breaks have helped support the US and, to some degree, the global economy. The big bonus of a Biden presidency, however, is the potential for better trade relations, which should have a positive impact on local and global share markets.
Biden is also likely to support structural change towards renewable energy sources, favouring innovative companies in the renewables sector but not great for companies with legacy energy assets.
Under Biden, the US is likely to rejoin the Paris Agreement on climate change to restrict global temperature hikes to two degrees above pre-industrial era averages. He also supports a global pledge of zero net carbon emissions by 2050. This will put pressure on our federal government to commit to a zero net emissions target, which will have an impact on investment in renewables.
For super fund investors, this is likely to mean a boost for sustainable ETFs and heightened activism from institutional investors, especially those who have signed up to the Task Force on Climate-related Financial Disclosures.
But with President Trump all but having conceded defeat, the real game for markets now is how the COVID-19 pandemic plays out into 2021.
Focus on global recovery
“With the pandemic still dominating the market, investors need to be mindful the global economy is not out of the woods and diversification in portfolios is essential,” says Nandita D’Souza, Citi Australia’s head of investment specialists.
“But there is still a number of potential market impacts following the Biden win. Citi’s view is that we can expect a more moderate discussion globally on foreign policy and trade tensions,” he adds.
Todd Hoare, head of equities at Crestone Wealth Managements, says risk appetite could prove resilient under a Biden victory, which is positive for equities. “Typically, 100 days after a US election, share markets are higher, on average, no matter whether it’s a Republican or Democratic victory.”
Investing under a house divided
Whether the Democrats will win both Congress and the Senate – what’s being termed as the ‘blue wave’ – won’t be known until late January. But it looks unlikely at this stage.
“While a split federal government in the US would lead to policy-making gridlock, this is not necessarily bad for markets. It means there are likely to be difficulties in passing significant legislation, including tax hikes and regulatory reform over financial services, which has the potential to dampen markets,” D’Souza says.
Hoare has a similar view. “Under a split government, there is a history of risk assets performing well, with the broader economy functioning strongly under a Democratic president yet Republican Congress. Although a Biden presidency will push for an increase in corporate tax rates, after similar increases in 1987 and 2013, the S&P 500 actually rose very strongly in the subsequent 12 months.”
A new optimism
Overall, Citi expects markets to continue to perform well into 2021 thanks to further US economic stimulus and easy monetary policy. “In particular, we are positive on the healthcare sector due to vaccine advancements, the infrastructure sector due to anticipated bipartisan support to use infrastructure as an area to boost job creation, and the mining sector in Australia due to global fiscal stimulus.” Local superannuation investors can get access to these industries through ETFs and managed funds.
Alex Jamieson, principal of financial advice firm AJ Financial Planning, notes US president elect Joe Biden is likely to take a more accommodative approach to China on trade compared to his predecessor.
“Biden is also unlikely to use executive orders to circumnavigate Congress on the trade front to push his agenda. This should result in less volatility in the markets in sectors that were directly exposed to this confrontation under the Trump administration. The Biden presidency should also remove a level of Trump-induced uncertainty in the broader market.”
In addition to this, Australia is less likely to be drawn into the standoffs between China and the US, which should also smooth the waters between Australia and China longer term. This should be generally positive for our share market.
A vaccinated end to the pandemic?
The updates on the COVID-19 vaccine front have been very encouraging, with three potential candidates developed by AstraZeneca, Moderna and Pfizer now in late stage trials. Markets have reacted positively to the news, with the Dow Jones breaking the 30,000-point ceiling. While this is a step in the right direction, there are still risks to vaccine timelines and outcomes. These include how the vaccine will be distributed, its efficacy and safety. As a result, a vaccine is not a silver bullet for markets or health outcomes. Yet.
“Given uncertainties still persist, super investors need to ensure they have a diversified portfolio to allow them to capture any upswings in markets but also implement risk management strategies to preserve capital if the risks eventuate,” says D’Souza.
“To do this, super investors should have a mix of asset classes, including defensive investment grade bonds that can provide a recurrent and reliable income stream, and then higher yielding assets to allow them to take advantage of a positive market outcome,” he adds.
Higher yielding assets can include equities, hybrids or tailored investments. Equities can deliver greater returns but come with added risk, while hybrids and tailored investments can provide an enhanced return with less volatility and downside risk management features.
Says D’Souza: “The vaccine news does not change our outlook for record low interest rates, which means seeking higher yielding assets is more important than ever, as investors need to compensate for returns of less than one per cent from cash.”
Market winners and losers
Jamieson says there is a number of industries that are likely to benefit from a vaccine, especially travel and tourism.
“These areas should stage a reasonable rebound as time goes on as travel opens up and becomes more accessible in the year ahead. Companies such as Sydney Airport Corporation, WebJet and Flight Centre should continue to benefit from vaccine news. Pharmaceutical companies with direct exposure to successful vaccines should also do well as they are able to monetise this research. Companies such as CSL should benefit.”
Hoare says a COVID-19 vaccine is positive for risk assets, although markets have already priced in news about a successful vaccine, suggesting downside to equity markets should one not eventuate.
“What’s more important than a vaccine on equity indices is what it means for sector rotation and relative industry performance. The gap between structural growth stocks and value stocks or COVID losers is significant. A more balanced growth outlook would likely precipitate a rotation into the hardest hit sectors such as hospitality, tourism, transport, casinos and banks. This would be at the expense of COVID winners that have benefited from greater use of technology and the work-from-home dynamic such as ecommerce, streaming companies and subscription business models.”
Geographically, Hoare says a vaccine should benefit emerging market countries COVID has decimated such as Brazil and India. “Europe, which is more trade sensitive, might also outperform more defensive markets like the US.”
He says companies selling alcoholic beverages should also do well. “Demand has been suppressed due to lockdowns and early closures of bars and the sector is trading abnormally cheaply versus food producers.”
While all this is insightful for super investors, the outlook and environment is still unknown. So expect the unexpected and structure the portfolio accordingly. What this means is diversification really counts.