After a relatively quiet summer characterised by positive surprises in second quarter earnings, what should we expect from markets by year-end? We are in the process of a rotation in driving market factors and this continues to evolve. After a spring rebound orchestrated by central banks and macro momentum, and a summer fuelled by stronger than expected bottom up data, this autumn should be driven mostly by the political outlook in the US and the pace of the macroeconomic rebound in the second half of the year (especially after somewhat disappointing activity surveys and weaker Q2 GDP figures than expected).
The US equity markets are back to all time highs, notably technology giants who have confirmed their status as winners of the new environment and further increased their grip on the global economy. Most of the summer heat on US Equities is concentrated on these technology leaders. The term “secular growth” has never been more accurate to depict the business model of companies characterised by growth seemingly immune to cyclical bumps. However, this does not mean that they are protected from the challenges of traditional companies; one should just look into the elevated operating margins of the FAANG* to see that these companies face cost-related issues as well. It is generally admitted that the one single risk that could question their leadership would be an antitrust-driven break-up of these companies. One should wonder how though: it is easier to dismantle a conglomerate than a powerful algorithm. Furthermore, recent regulations on data protection could play the role of a barrier to entry precisely protecting the market position of these leaders. However, antitrust issues are there, and now coming this time not from the government, but from companies participating in the US technology ecosystem.
This topic will be one discussed during the presidential campaign which will fully kick-off this month, after the Republican convention held in Charlotte. We have all learned to be more humble when it comes to interpreting polls and establishing forecasts, but we still have to try and anticipate the market implications of each scenario, bearing in mind that hedging strategies implemented ahead of the elections are sold right after and regularly produce the opposite result. On that front, financial markets are sending us somewhat conflicting messages: whilst foreign exchange traders seem to price in a Biden victory with a potential majority at the Senate (therefore weighing on the greenback), equity markets are not positioned for a scenario where the new Biden administration would have room to apply its program and increase corporate taxes and minimum wages. Investors need to think longer term than politics, but this election could be a game-changer for markets, from USD and gold to equities and treasuries.
The moment of truth is approaching and one should remember politics is not a world of economic rationality, but about psychology and perception. The very particular nature of this election can only increase the risk of surprises in a country where the last election result was decided by 10’000 voters in Michigan (two over 74 years of age candidates, a very unusual and polarising President facing a liberal long-timer adopting more radical proposals, an expected higher participation rate, but also a higher proportion of postal votes which could trigger many bulleting rejections). Therefore, one thing is for sure, a Biden presidency is not yet a done deal.
* FAANG is an acronym that refers to the stocks of five prominent American technology companies: Facebook, Amazon, Apple, Netflix; and Alphabet (formerly known as Google).
Monthly House View, 27/08/2020 release - Excerpt of the Editorial
September 07, 2020