CIO Matthew Benkendorf discusses the tech and consumer staples sectors, the new US administration, and monetary and fiscal stimulus.
Virus-induced disruptions have accelerated some important trends, such as the shift to e-commerce, that were already underway. Markets are pricing in the end of the pandemic, and investor focus is now poised to shift to the pace of economic healing.
The technology sector now accounts for 27% of the S&P 500 Index1, with a small number of companies dominating performance. It is a naturally consolidating space and many leading companies, such as Google, hold quasi-monopolistic positions. While large IT companies have recently attracted greater regulatory scrutiny, we do not think investors should be concerned from a US perspective. We believe consumer behavior will drive future growth in IT companies and we are closely watching how these companies are adding value for their customers.
While dominant consumer staples franchises have historically provided consistent, reliable earnings growth and protected in declining markets, they have not performed well amidst COVID restrictions this year. We expect the challenging backdrop for staples to persist during the next few months until a vaccine becomes widely available. However, we do not expect as much share price volatility compared to the early stages of the pandemic and we believe large consumer staples brands with enduring franchises will continue to be resilient longer term.
A new administration in the US typically has little impact on long-term market returns. However, corporate profit growth, which helps drive equity performance, is likely to be bolstered if new fiscal stimulus is approved. During the past year, government stimulus has helped to dampen volatility and minimize equity drawdowns. Today, monetary policy actions present diminishing returns given that rates are already at or below the zero bound. This is why investors are more receptive to increased government spending.
1 As of 30 November 2020
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