With November 3 fast approaching, stock markets continue to show signs of volatility. You’re probably wondering what the impact of this election could be on your investment portfolio and what FDP is doing to protect it.
Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
Republican or Democratic majority, and other scenarios
At the start of the year, the U.S. election was already considered one of the major events of 2020, as well as a source of uncertainty for the markets. In terms of investments, the results will certainly have an effect on the economic sectors and geographic areas in which to invest.
Let’s look at the possible scenarios, based on the outcome.
Biden Presidency
The sectors of economic recovery, such as the industrial sector and materials, which are more cyclical, will benefit from additional investment, which will also lead to an increase in the deficit. The U.S. dollar should weaken, which would be positive for emerging economies as well as for European equity markets, which are more exposed to cyclical stocks. This shift should result in a rise in value stocks, which have been out of favour in recent years relative to growth stocks.
Democratic majority in the Senate and in the House
Taxes could go up. However, not all Democrats favour such increases, and the economy needs a fiscal stimulus now.
Republican majority in the Senate and Democratic majority in the House
Spending would likely be approved only if the economy deteriorates considerably. Concerned about deficits, Republicans would limit spending, which would be a major obstacle to fulfilling the President’s promises.
Trump Presidency
Spending will be lower and the pursuit of an isolationist foreign policy could slow the global economic recovery. Difficult relations and trade tensions with China, as well as discord with Europe, are expected to continue.
Republican majority in the Senate and in the House
Tax incentives such as the extension of the 2017 tax cuts would be on the agenda.
Republican majority in the Senate and Democratic majority in the House
Republicans may be more inclined to support the economy, especially if they see the potential for political gain.
The winners on the markets
Among the stocks that have performed the best of late have been those of growth companies, particularly big technology firms, some of which have reaped significant profits from the changes triggered by the health crisis. These advantages may continue to grow during the second wave of the pandemic.
Whoever wins on November 3, more cyclical sectors like industrials, which includes companies like Caterpillar, will undoubtedly benefit from an economic stimulus package based on infrastructure projects. Whether these projects are for the development of green energies as favoured by Biden, or whether they involve less spending as envisaged by Trump, their implementation after the election should give a big boost to the U.S. economy.
We mustn’t forget, though, that the pandemic, which is still growing in the United States, adds an element of uncertainty to the actual implementation of these initiatives.
Our strategies for these possibilities
Aware of the challenges, we have put in place a Barbell positioning. According to this strategy, the best way to achieve a balance is to invest in the two extremes of investing, i.e. high-risk issues and risk-free issues, while avoiding the choices that fall between these two options. So investments are made in two completely different types of vehicles, based on the fact that forecasts can be wrong and that risk assessments can contain errors. It is both a hyper-aggressive and a hyper-conservative strategy, which seeks to capitalize on the outcome of a situation, whatever it may be.
As for our external managers, there are few changes to report in the portfolios they manage, except in terms of the choice of investment sectors in certain cases. This lack of responsiveness is largely due to the bottom-up approach to investing used by these managers, which is based on an in-depth analysis of each company and its development potential, rather than focusing on macroeconomic cycles. In this context, political repercussions are of little consequence.
We remain cautious in our approach and proactive to events.
Yann Furic, B.B.A., M. Sc., CFA
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.
U.S. SPECIAL ELECTIONS WEBINAR (in French only)
To fully understand the impact of this historic election, participate in our webinar which will be broadcast on November 5, at 7:30 p.m. Our experts will offer their analysis of the results and their outlook on the reactions of the stock markets.
Our special guest, John Parisella, will share his thoughts on the new U.S. presidency.
