Life Imitating Art
John Leiper – Chief Investment Officer – 6th October 2020
In a case of life imitating art, the ‘debate’ was anything but, with Chris Wallace failing to moderate a chaotic and toxic shouting match between two men that should have known better. If I had to draw one conclusion from the debate it would be that Biden performed much better than expected. Betting odds for a Biden win improved considerably after the debate and a new Wall Street Journal/NBC News survey, which was conducted in the two days following the debate, put Biden’s lead at 14 points. That’s up from 8 points in September and a prior 11-point high in July.
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At the end of the week, we received the shocking news that President Trump had tested positive for the coronavirus. The initial reaction was negative and the market now awaits the answers to a number of questions including how the virus will affect the president, his political allies (and opponents – Biden shared a stage with Trump), the economy and the election. Trump contracting COVID-19 is unlikely to affect whether someone upgrades to a new iPhone but his diagnosis could impact public perception, particularly amongst those who may have considered the pandemic a hoax, to the detriment of any ongoing relaxation of lockdown provisions. This may well have been the case in the UK with Boris Johnson’s hospitalisation contributing towards increasingly conservative behaviour and therefore a greater economic hit relative to neighbouring countries. Further, when Johnson contracted COVID-19 it led to a temporary wave of sympathy across the country (although this has long since been exhausted). In contrast, Trump is going out of his way to demonstrate that he remains in good health which is unlikely to produce a wave of public support. Notably, a Reuters/Ipsos poll released on Sunday shows most Americans thought Trump could have avoided the infection if he had taken the virus more seriously. So, no sympathy boost and to top it off the diagnosis will also prevent him from attending rallies, which could prove a disadvantage for an incumbent trailing in the polls.
However events transpire, we see four potential outcomes from the US presidential election:
- Disputed or questionable election result
- Trump wins
- Biden wins and Republicans hold Senate
- Biden win and Democrats achieve clean sweep across both chambers of Congress
Trump has repeatedly claimed that mail-in ballots are susceptible to voter fraud and that he may refuse to accept the election result should he lose. That sounds dramatic, but to concede an election is more an act of tradition, born out of statesperson like conduct, than an obligation. We think this outcome is highly unlikely, but if it does happen, it is reassuring to know there are clear laws in place that dictate both the process and timeline for dispute resolution. The United States is a developed market country with rigorous institutions designed to ensure the peaceful transfer of power. In the past they have handled assassinations, impeachment, resignations and violent riots so Trump refusing to concede is not an outlier. The constitution states that a new President must be inaugurated by the 20th January, so in the worst-case scenario we could be in for a month or two of elevated uncertainty. That’s not ideal but the long-term consequences to the economy, and markets, will be minor. As a short-term guide, we can look to the 2000 George Bush/Al Gore election recount which saw safe-haven assets rally, such as Gold and Treasuries, whilst risk assets sold-off.
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No eventual winner of the US presidential election has gone into, and come out of, the first debate trailing their main rival by as much as Trump does right now. That said, there is a big difference between the popular vote and the Electoral College, as Hilary Clinton found to her disadvantage in 2016 so a Trump win remains on the cards. It all comes down to a few key states including Florida, Texas, Ohio and Iowa. The odds are not in Trump’s favour, but the polling differentials are not far off the margin of error. If Trump does win, we see that as a continuation of the status quo although there could be a notable impact on healthcare stocks. This follows Trump’s nomination of Amy Coney Barrett to replace Supreme Court Justice Ruth Bader Ginsburg. If confirmed she could be the deciding vote in a landmark legal challenge which seeks to strike down the Affordable Care Act, which has been beneficial to the sector’s business model.
Should the Democrats achieve a clean sweep, which includes the White House and both chambers of Congress, the most likely outcome is more taxes and regulation which could hit risk assets generally. However, a sizeable fiscal package focused on housing, social security and healthcare, and plans for an ambitious Green New Deal, will offset some of these concerns whilst directly benefiting certain subsectors of the economy such as infrastructure and renewable energy. Further, the Democrats can pre-empt the supreme court ruling, by taking the necessary steps to render the legal challenge invalid, benefiting healthcare stocks – whose future increasingly hangs in the balance. Sizeable fiscal spending will most likely steepen the yield curve, particularly in the short term. On trade, Biden will retain a strong stance against China, but it will be less antagonistic or unilateral in nature and likely result in lower tariffs and a more stable global trading environment which is US dollar bearish. This scenario lends itself towards opportunities in non-US risk assets, notably emerging markets.
Finally, if Biden wins, but the Republicans retain the Senate we see that as something of a half-way house, moderately negative for the US dollar and somewhat positive risk assets, assuming additional stimulus, if required, is forthcoming and not subject to political gridlock.
The ACUMEN portfolios are positioned for a potential pick-up in volatility with a clear preference for quality assets. Meanwhile, our strategic market outlook is arguably more skewed towards a Biden clean sweep than the alternative scenarios, given our medium term forecast for a weaker US dollar, steeper yield curve and preference for ESG securities and emerging markets versus US equities. The election is held on the 3rd November and a lot can change between now and then. As such we continue to monitor the situation whilst maintaining a disciplined approach to risk management and portfolio construction.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.
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Welcome to the Q2-2021 ‘Quarterly Perspectives’ publication
In its latest economic outlook, the OECD increased its expectations for global GDP. For 2020, the improvement is minimal, reflecting an upward revision, in real GDP, from -4.5% to -4.2%. But beyond that, growing economic momentum should boost global growth to pre-pandemic levels, estimated at 4.2% in 2021 and 3.7% in 2022.
Markets are ebullient, and they have every reason to be.
On Monday afternoon, global stock markets soared on the news BioNTech and Pfizer had created a coronavirus vaccine which proved 90% effective based on initial trial results. The story behind the breakthrough, which you can read here, is fascinating, not least because the husband and wife team behind the virus don’t yet know why it works.
The narrative, heading into the US election, was a ‘Blue Wave’ victory for the Democrats. Polls and betting odds favoured a Biden win and a Senate majority and investors positioned accordingly. Anticipation for a huge fiscal stimulus package, estimated at $3 trillion+, lent itself to the global reflation trade which would stimulate the economy and revive inflation, benefiting cyclical assets whilst hitting government bonds.
The ACUMEN Portfolios continued their strong run throughout October, largely outperforming the market composite benchmark and IA sectors (used for peer group comparison purposes) which lost ground across the board.
With the US election just 8 days away, financial markets are following the polls and pricing in a Biden win. The prospect for a Democratic clean sweep has contributed to the rising ‘Blue Wave’ narrative benefiting those companies that stand to benefit from Democratic party policy. Meanwhile a long/short basket of companies more closely aligned with Republican policy and values has steadily underperform.
Welcome to the Q4-2020 ‘Quarterly Perspectives’ publication.
On Tuesday Fed Chairman, Jerome Powell, made a speech at the National Association for Business Economics, during which he implied the government should err on the side of caution and provide too much stimulus rather than too little.
The following is an abbreviated version of my recent article ‘A Deep Dive Into… UK Equities’ for Investment Week magazine. Follow the link and read my views on page 17.
Last week the FTSE Russell decided to include Chinese government bonds in its flagship World Government Bond Index (WGBI). The decision follows similar moves, from JP Morgan and Bloomberg, and a failed attempt to do so just one year prior which resulted in a number of reforms, to increase accessibility and currency trading options, that ultimately paved the way for benchmark admission.
In last week’s blog we discussed the ‘Nasdaq whale’, Softbank, and the role it played, alongside an army of retail investors, driving tech prices ever higher prior to the recent correction. These short-term ‘technical’ flows are driven by the options market as traders look to hedge their underlying exposure, amplifying moves both lower and higher.
The ACUMEN Portfolios continue to perform well. As you can see from the table below, performance for the rolling quarter (to the end of August) remains strong relative to the market composite benchmark and the current assigned IA sector, which I understand many advisers use for comparison purposes. ACUMEN Portfolios 3-8 were all in the first quartile and ranked in the top 15 within their category.
In a speech for the history books, last week Fed chairman Jerome Powell announced a significant change to the way it conducts monetary policy by formally announcing ‘average inflation targeting’. This means the Fed will now allow inflation to overshoot its official 2% target to compensate for prior years where inflation failed to reach that level.
Despite the fact the coronavirus has plunged many countries into recession, global equity markets are now back at all-time highs, as measured by the Bloomberg World Exchange Market Capitalisation index.
In The Return Of Inflation (5th June 2020) we made the case for a transition from the existing deflationary narrative to one in which markets start to price-in inflation.
Having identified, and benefited from, the 7% fall in the value of the US dollar index since late April, we have now turned tactically cautious.
In last week’s blog, This Time It’s Different (24 July 2020), I suggested the US dollar was on the cusp of crashing through its decade-long uptrend.
There are growing signs that the US dollar may finally roll over.
Welcome to the Q3-2020 ‘Quarterly Perspectives’ publication.
The 10 year US Treasury yield has remained remarkably steady over the last few months, particularly as inflation expectations have gradually risen.
Those stocks that outperformed during the corona crisis are the same ‘winners’ that outperformed before the crisis.
The recovery in US equity prices, from the corona crisis, has been one of the most rapid in history.
China’s economy has transitioned, from an industrial export-led model, towards services.
Commodities are nothing if not cyclical. They rise and fall in value with remarkable consistency over time.
Quantitative easing, or QE, is where a central bank creates money to buy bonds. The goal is to keep interest rates low and to stimulate the economy during periods of economic stress.
In January 2019 Jerome Powell pivoted from a policy of interest rate increases and balance sheet cuts to interest rate cuts and, later that year, balance sheet expansion.
Over the last decade, the Fed has increasingly resorted to unconventional monetary policy, such as quantitative easing, or QE, to stimulate the economy.
In response to the corona crisis, global central banks have unleashed a tidal wave of liquidity.
One question I get from advisers and clients, more than any other, is why global equity markets have bounced back so far.
In the early stages of the Corona Crisis of 2020, the global economy faced a liquidity crisis.
In an unprecedented day in the history of oil trading the price of the front month contract for West Texas Intermediate (WTI) oil fell below zero to -$37.63.
In a trading update last week, the listed adviser warned that the outbreak has caused commercials conditions to become “extremely challenging”
Bosses at Tavistock Investments have taken a voluntary, significant pay cut…
As the world’s reserve currency, the US dollar is the go-to currency. It is used to price assets, complete transactions and as a store of value.
Brian Raven tells Proactive Investor its two protected UCITS trusts have proved themselves during the current market volatility caused by the coronavirus pandemic.
The coronavirus has brought economic activity to a virtual stand-still and transformed a strong global economy, with lots of debt, to a weak economy… with lots of debt.
Last week, we considered the debt story behind the coronavirus. The fear of a large debt overhang, as the economy slows, led to concern that households and companies could start to default on their...
In the past three weeks, global equity markets have fallen almost as much as in the Financial Crisis of 2007-08.
Investment sector veteran Hugh Simon has taken a near 5% stake in wealth consolidator Tavistock in a strategic partnership.
In the past week, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.
Halcyon days, global equity markets have fallen again and yields on developed market government bonds have collapsed even further.