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Weekly View – Biden time for markets

Donald Trump’s poll numbers were looking increasingly unhealthy at the time of writing, but at least the cocktail of drugs administered to the coronavirus-stricken President appears to have worked. This is encouraging news in the fight against the virus and a considerable achievement for Regeneron, whose founders increased their stake in the company after a French pharma group pulled back earlier this year. At this point, markets are increasingly taking on board the probability of a Biden victory – an eventuality that would at least provide some clarity and open the way for further fiscal stimulus. Nonetheless, we still believe there is a risk that the election is contested and/or inconclusive—and whatever the talk of a ‘Blue Wave’, it is uncertain whether the Democrats will gain control of the Senate. If they do, the size of the fiscal stimulus pushed through could be substantial, which would be good news for sectors such as infrastructure and materials. We might also see a sector rotation away from tech, especially as the tech giants could come under increasing antitrust pressure from a Democrat administration, while rising bond yields (with extra stimulus raising inflation expectations) would mean the tech sector’s future cash streams look less attractive.

The Q3 earnings season is upon us. We expect the year-on-year decline to slow from Q2, more so in the US than in Europe. But companies are cushioning earnings and margins by cutting costs hard, which means jobs losses and a tailing-off in the job recovery. This makes further fiscal stimulus all the more necessary. Of the 69 of S&P 500 companies that have issued guidance so far (versus 100 to 110 usually), two-thirds have sent positive guidance, a much higher proportion than is normal. We believe there is a good chance we will see positive surprises in Q3 but we need to see more companies setting out their investment plans.

At the end of Golden Week in China, signs continue to emerge that the country is well set on the path to recovery, with consumer sales rising by 4% year-on-year during the Golden Week holiday. With the Chinese communist party set to roll out its five-year plan for 2021-2025, we like Chinese assets, including the renminbi, whose value is being buoyed by this positive news flow, by attractive local bond rates and by the prospect of a Biden presidency.

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Cesar Perez Ruiz
Cesar has more than 25 years’ experience running investment strategies in both wealth and asset management, with a strong bottom-up equity portfolio management track record and substantial multi-asset class investment strategy expertise.
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