Robeco: Commentary on preliminary US election results

Robeco: Commentary on preliminary US election results

4 november 2020

Verenigde Staten Politiek
Amerikaanse Verkiezingen.jpg

By Fabiana Fedeli, Global Head of Fundamental Equities

“At the time of writing, the race is tight and could go either way. This is true for both the Presidential election and for Congress. Until we have a clear win, and this may take until Friday, we should expect markets to be volatile and trade on election outcome news. A contested outcome would drag this volatility for as long as we have a clear result.

A President cum Congress would be a positive for markets whether it is Blue or Red. Markets don’t like uncertainty first and foremost and a President with the support of Congress would allow for more effective policy execution, including a support package. Either administration, supported by Congress would implement policies to support the economy.

From the point of view of equity markets a divided Congress at this point is the least desirable scenario, independently from which side wins, as this could mean delays in policy execution and in what we believe is a much needed stimulus package in the near term.

There are two equity trades here: in the short term, until uncertainty on the outcome continues, we can expect investors to turn more defensive and some of those “Blue sweep” trades that we have seen arising since the summer and even more so over the last few days are likely to unravel: EM equities and FX, including China, the renewables theme (on expectation that a Biden administration would favor more environmentally friendly policies), and cyclicals over big tech. We are also likely to see some relief in “Red tide” trade, such as oil, or Russia which is a country that is expected to incur sanctions under a Biden administration. This however, could be a very short term trade and just in place until we have some clarity on the win.

In the end, which side wins will not determine equity market direction but rather sectors and – at an international level - country selection. What will really count are the type of policies implemented and the impact on the economy from the developments of a Covid-19 outbreak. One key point to watch is  the timing of a US stimulus package, as a delay would be negative for the US economy, consumption and cyclicals. Given the polarization in equities markets between cyclicals and growth stocks, and given the high expectations already embedded in the tech-savvy stocks that have driven the upside in equity markets, the next stage of market upside will have to come from the more cyclical stocks. These, however, need better visibility on an economic pickup.  Keep your eyes peeled on policies and Covid. That’s what really counts.”

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