Quality Growth Boutique
Global equities specialists since 1984. We provide a boutique investment experience for institutional and intermediary clients around the world.
The market craves stability and transparency. As an efficient auction mechanism, it relies on visibility to price stocks and economic activity. Typically, the market—and people in general—do not like change, but this time, as we stand at the precipice of a tremendous change, what we are seeing is actually a potential return to real stability, normality and transparency. While today marks an official transfer of leadership in the White House, as Joe Biden is inaugurated as the 46th US president, the types of policies we can expect to see are not radically different from what we have seen historically. Additionally, corporate profit growth, which helps drive equity performance, is likely to be bolstered in the short term if new fiscal stimulus is approved.
There is a significant dichotomy in the US, whereby many large, listed corporations are seemingly doing well—and, in some ways, great—while non-listed, small- and medium-sized businesses, which comprise the bulk of the employment in this country, are struggling day to day. The policies we could see address this are more likely to work from the bottom up, with initiatives supporting wages for workers first, and then businesses, with a focus on smaller companies. As a consumption-oriented economy, it makes sense to spread the pie by seeing more of the population with more spending power to fuel into the economy. As such, consumer-driven businesses could be beneficiaries over the next four years.
But it’s not that simple. Development of multiple effective vaccines has given us hopeful visibility of COVID’s remaining life cycle—and distribution, while initially disappointing, should be fine-tuned as we move forward. At some point, whether that be six or nine months from now, we’ll be able to look back on COVID as a point in time. However, despite any positive rhetoric we might see, the greatest risk looming ahead of us could be a negative economic surprise. Until we get COVID out of the way, it’s unclear how deep the economic hole is, and even less clear how quickly we’ll be able to dig ourselves out of it.
As broadly announced by Biden, the fight against COVID is one of his key priorities. Additionally, Biden’s presidency will bring a more environmentally focused agenda, which could see more pressure or scrutiny on sectors sensitive to environmental regulation, such as energy and commodities. Given health care has been a big Democratic focus, we could see more volatility in that sector, but the health care names with solid fundamentals should continue to do well. Financials, which already have been under pressure, also could see some volatility, as these companies are less likely to get much reprieve or incremental improvement, from a regulatory standpoint, given the typically heavier hand of a Democratic administration.
Virus-induced disruptions have accelerated some important trends, such as the shift to e-commerce, that were already underway. The technology sector now accounts for 27% of the S&P 500 Index , 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 in US tech companies should be overly concerned. 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.
From an investing perspective, with more uncertainty to come, e.g., changes in interest rates and political disruption, that could shake markets and companies, it is important to focus on companies that are resilient to macroeconomic dislocations. Regardless of the macro or political backdrop, drilling down into company fundamentals and looking for predictable long-term earnings power is key. Investors should look for companies with proven and repeatable models and established market-leading positions, and tune in more to the underlying status of specific businesses and their durable, sustainable growth prospects.